Alan Greenspan Fail

I am angry with this man, be wiser and admit your mistake. Don't wait to be guilled to one corner and finally admitted that you are partially wrong.

Wise people see the outcome and accept it, Greenspan still think he was right for 40 years. Yes! I agree that he is right for 40 years only. How about the outcome now?


The Straits Times
Oct 25, 2008
I was 'partially' wrong

Greenspan, grilled by lawmakers, says: My view of the free market was flawed
WASHINGTON: As head of the world's most powerful central bank, Mr Alan Greenspan has testified before the US Congress dozens of times over almost two decades.

At every hearing, lawmakers solicited the economic wisdom of 'the Oracle'. Markets jumped up or down depending on what 'the Maestro' said.

But not on Thursday.

This time, instead of praise, lawmakers heaped blame on the 82-year-old former chairman of the US Federal Reserve for the current crisis and asked him time and again whether he had been wrong, why he had been wrong and whether he was sorry.

Grim-faced, Mr Greenspan could offer only a limited defence. Almost three years after stepping down as the Fed chairman, a humbled Mr Greenspan admitted he had put too much faith in the self-correcting power of free markets and failed to anticipate the self-destructive power of wanton mortgage lending.

In his trademark gravelly monotone, he acknowledged he was in a state of 'shocked disbelief' at the breakdown of credit markets that triggered what he called 'a once-in-a-century credit tsunami'.

His appearance before the House Oversight and Government Reform Committee was his first in such a public forum since the crisis began and provided a dramatic bookend for the demise of the economic boom and the unmaking of his reputation.

Mr Greenspan's critics have complained that, starting in 2001, he kept interest rates too low to help bolster the US economy after the bursting of the dot.com bubble and the terrorist attacks of Sept11 that year. That easy credit, they say, fuelled a runaway housing boom.

They also allege his free-market ideology kept him from using the Fed's authority to regulate adjustable-rate mortgages and complex financial derivatives - regulation that could have helped prevent the current crisis.

Under tough questioning from committee chairman Henry Waxman and other Democrats, Mr Greenspan conceded he was wrong in assuming free-market forces would prevent the crisis.

The hearing was the third in a series Mr Waxman is holding to identify the causes of the financial crisis. Mr Greenspan knew he was in for a tough day. And Mr Waxman hit him at the start.

For too long, the prevailing attitude in Washington has been that the market always knows best,' Mr Waxman said. 'The Federal Reserve had the authority to stop the irresponsible lending practices that fuelled the sub-prime mortgage market. But its longtime chairman, Alan Greenspan, rejected pleas that he intervene.'

Mr Waxman, noting the former Fed chairman had been one of the nation's leading voices for deregulation, displayed past statements in which Mr Greenspan had argued that government regulators were no better than markets at imposing discipline.

'Were you wrong?' he asked.

'Partially,' Mr Greenspan reluctantly answered, before trying to parse his concession as thinly as possible. 'Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief.'

He said his mistake was thinking that financial institutions would act in their own self-interest to avoid the kind of risky lending that could bankrupt them.

'I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,' he said.

He said he had been shocked by the failure of banking officials to protect their shareholders from their bad loan decisions. 'A critical pillar to market competition and free markets did break down. I still do not fully understand why it happened.'

'You had the authority to prevent irresponsible lending practices that led to the sub-prime mortgage crisis. You were advised to do so by many others,' Mr Waxman pointed out. 'Do you feel that your ideology pushed you to make decisions that you wish you had not made?'

'Yes, I've found a flaw,' said Mr Greenspan. I don't know how significant or permanent it is. But I've been very distressed by that fact.'

'In other words, you found that your view of the world, your ideology, was not right, it was not working,' Mr Waxman said.

'Absolutely, precisely,' replied Mr Greenspan, who stepped down in 2006 after more than 18 years as Fed chief. 'That's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well.'

Mr Greenspan said that he had publicly warned about the 'under-pricing of risk' in 2005 but that he had never expected the crisis that began to sweep the entire financial system last year.

'This crisis has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount.

'Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment.'

Near the end of the four-hour grilling, which he shared with former Treasury secretary John Snow and Securities and Exchange Commission chairman Christopher Cox, Mr Greenspan suffered a final indignity.

The man dubbed 'the Maestro' for orchestrating fiscal policy during 18 years as Fed chief found himself likened to one of the great goats of baseball.

'I feel like I'm looking out there at three Bill Buckners,' said Representative John Yarmuth, referring to the Boston Red Sox first baseman who botched an easy grounder in the 1986 World Series. 'All of you let the ball go through your legs.'

NEW YORK TIMES, LOS ANGELES TIMES, REUTERS