Greenspan's Crisis

There’s plenty of blame to go around for the financial crisis that wrecked the U.S. economy—just ask Alan Greenspan.

For nearly three hours today, that’s just what the Financial Crisis Inquiry Commission did. Greenspan, who chaired the Federal Reserve from 1987 to 2006, had plenty of answers for the congressionally appointed panel.

Financial institutions did not have enough capital to contain the crisis, he said. The federal government’s policy goal of increased homeownership led to growing demand from Fannie Mae and Freddie Mac for subprime mortgage securities. Demand grew from foreign investors for collateralized debt obligations, because of their high yields. Credit rating agencies gave these securities AAA ratings “that in retrospect were nonsense,” Greenspan said.

What about the Fed itself? Well, the once-exalted “maestro” said, sure we made some mistakes, but we were right 70 percent of the time. Looking back and asking whether you could have done something differently is “a futile activity—you can’t in the real world do it.”

But that’s the mission of the commission. Like the panel that investigated the September 11, 2001 terrorist attacks on America, it has been assigned the task of getting at the root of a disaster, and making recommendations on how to avoid a repeat.

Some commissioners think the Fed deserves a lot more responsibility for the financial crisis than Greenspan was willing to accept.

“The Fed utterly failed to prevent the financial crisis,” said Brooksley Born, a commissioner who proposed regulating derivatives trading when she headed the Commodity Futures Trading Commission but was shot down by Greenspan and former President Bill Clinton’s economic team.

Besides failing to recognize the systemic risk that unregulated derivatives trading posed, Greenspan’s Fed failed to prevent the housing bubble and predatory lending, and allowed banks and bank holding companies to engage in activities that would bring the financial system to the verge of collapse, she contended.

Born asked Greenspan whether these failures were caused by his libertarian bias against regulation.

“I don’t have the discretion to use my own ideology to affect my judgments on what Congress is requiring the Federal Reserve and others to do,” he responded. “I ran my office as required by law. That was my job.

“I really fundamentally disagree with your point of view,” he told Born.

That was the sharpest exchange Greenspan faced all morning, but Former California State Treasurer Phil Angelides, who chairs the commission, pressed Greenspan on why the Fed didn’t do more to combat abusive lending practices and why it allowed subprime mortgages to infect the entire financial system.

Greenspan said the Fed did issue guidance on subprime loans. They exploded because of Fannie Mae and Freddie Mac’s insatiable appetite for securities backed by these loans, he said. This appetite, in turn, was fueled by the goal—widely held by Washington policymakers—to increase the rate of homeownership in America. By 2004, 69 percent of U.S. households owned their homes, compared with 64 percent a decade earlier.

At the time, foreclosure rates were low. If the Fed had taken actions to reverse what everybody at the time thought was a good trend, “Congress would have clamped down on us,” Greenspan said.

Go back and look at what members of Congress said at the time, he suggested.

“There’s a lot of amnesia that’s occurring currently,” he said.

Even at 84, Greenspan remains a fierce defender of his legacy. Toward the end of the hearing, there was a power outage in the House committee room where the hearing was held, but the commission opened the huge black curtains behind the dais to let some light in, and Greenspan’s grilling continued.

At the end, Angelides thanked Greenspan for his service to his country and his testimony.

“You gave a lights-out performance,” Angelides said.

Presumably, he was making a joke about the power outage, not Greenspan’s reign at the Fed.

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Kent Hoover is the Washington bureau chief for bizjournals.