Greenspan Testifies before Congress

Former Fed Chairman Alan Greenspan testified before the House of Representatives Committee on Oversight and Government Reform yesterday. He told the legislators that he was “shocked’ that the self-interest of lending institutions didn’t prevent a credit meltdown. He sounded like Claude Rains as Captain Renault in “Casablanca;” he was “shocked” to find out there was gambling at Rick’s. Except the good captain was being sarcastic.

Mr. Greenspan does get a tip of the hat for admitting to being “partially” wrong in resisting regulation of some securities activities and instruments. He did have some concerns as early as 2005 about investors not taking the risks they were running seriously. He remarked, “This crisis, however, has turned out to be much broader than anything I could have imagined.”

He put the blame on the securitizers of mortgages and rating agencies. “Without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer,” he said. He also said, “The consequent surge in global demand for US subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem.”

That said, he also confessed to having “found a flaw” in the market-oriented approach. “That is precisely the reason I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well.” In 2005, he said in a speech, “private regulation generally has proved far better at constraining excessive risk-taking than has government regulation,” and it turns out that that isn’t the case here.

Looking ahead, Mr. Greenspan said that a recovering housing market is the basis for an overall economic recovery. The housing recovery is “many months in the future.” Meanwhile, he expects unemployment to rise, and that will drive down consumer demand. He is of the opinion that the economy is probably in a recession or heading into one.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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