Greenspan: U.S. Will Take Months To Recover

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Former Fed Chairman Alan Greenspan told House lawmakers the financial damage done to date means an unavoidable rise in unemployment in the U.S. Greenspan said the U.S. had been hit by a "once-in-a-lifetime credit tsunami" and that it will take many months for the situation to improve.


From NPR News, this is All Things Considered. I'm Melissa Block. Shocked disbelief, that's the state Alan Greenspan says he finds himself in. The man long viewed as an economic guru admitted today that the financial crisis has exposed flaws in his understanding of the economy. Greenspan ran the Federal Reserve for nearly two decades, and today, he was grilled by a House committee on why he hadn't done more to prevent the crisis. NPR's John Ydstie has our story.

JOHN YDSTIE: Today's hearing was clearly not a pleasant experience for Greenspan, who, not so long ago, commanded unparalleled respect and deference on Capitol Hill. This time, congressmen challenged him, goaded him, and interrupted him. This question from Ohio Democrat Dennis Kucinich captures the mood.

Representative DENNIS KUCINICH (Democrat, Ohio): You know, when did you know there was a housing bubble, and when did you tell the public about it?

Mr. ALAN GREENSPAN (Former Chairman, Federal Reserve): Let me just go...

Representative KUCINICH: Will you answer the question?

Unidentified Woman: The gentleman's time has expired. Mr. Greenspan can answer, but your time has expired.

Representative KUCINICH: When did he tell the public about it?

YDSTIE: Greenspan did finally get a chance to respond to the question. The former Fed chairman said the housing bubble became clear to him in early 2006. But he admitted, he didn't anticipate how much home prices would fall.

Mr. GREENSPAN: I did not forecast the significant decline because we had never had a significant decline in prices.

YDSTIE: The House Oversight Committee's chairman, Henry Waxman, a California Democrat, grilled Greenspan on why he ignored a warning in the year 2000 from Federal Reserve Governor Ned Gramlich about the dangers of subprime mortgages.

Representative HENRY WAXMAN (Democrat, California): He urged you to move with the power that you had as the chairman of the Fed, that you put in place regulations that would have curbed these emerging abuses in subprime lending, but you didn't listen to Mr. Gramlich. Do you think that was a mistake on your part?

Mr. GREENSPAN: Well, I question the facts of that. He and I had a conversation. I said to him I have my doubts as to whether it would be successful.

YDSTIE: At one point, the back and forth during the hearing went beyond specifics and became philosophical and happened when Waxman challenged Greenspan over his support of unfettered free markets, and his belief that, quote, "we've tried regulation and none meaningfully worked."

Representative WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made?

Mr. GREENSPAN: Well, remember that what an ideology is is a conceptual framework with the way people deal with reality. Everyone has one. To exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw in the model that I perceived is a critical functioning structure that defines how the world works, so to speak. I was shocked because I've been going for 40 years or more with very considerable evidence that it was working exceptionally well.

YDSTIE: The basic flaw in his theory, said Greenspan, was his view that financial institutions can be relied on to operate in their own self interest. That, he thought, would provide sufficient protection for shareholders. It turned out not to be true. Greenspan, who has argued that derivatives provide an important contribution to the economy, admitted that the ones at the core of the current financial crisis, credit default swaps, should be regulated. The former Fed chairman said this crisis is a once-in-a-century tsunami. He said, given the financial damage to date, he can't see how significant rises in layoffs and unemployment can be avoided. John Ydstie, NPR News, Washington.

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Greenspan Calls Financial Crisis A 'Credit Tsunami'

The current global financial crisis is a "once-in-a-century credit tsunami" that policymakers did not anticipate, former Federal Reserve Chairman Alan Greenspan told Congress on Thursday.

Stocks rebounded in early trading after a drubbing the previous session as investors bought beaten-down stocks even as they absorbed disappointing economic news — a larger-than-expected increase in jobless claims.

The Labor Department's report offers fresh evidence that the economy is slowing despite government relief efforts and gradual improvements in world credit markets. The department says new applications for unemployment benefits rose 15,000 last week to a seasonally adjusted 478,000. That is above Wall Street's estimate of 470,000.

Worries about the economy sent the Dow Jones industrials tumbling 514 points Wednesday after a 231-point drop Tuesday. On Thursday, the Dow blue chips closed up 172 points to 8,691, a rebound that wasn't surprising after such a huge pullback.

Greenspan was to be the leadoff witness at a House hearing that lawmakers called to question past key financial players about what they think caused the most grave financial crisis since the 1930s. The witnesses also were expected to be asked how they thought the government would deliver the nation from the economic turmoil.

Greenspan was the chairman of the Federal Reserve for 18 1/2 years. In testimony prepared for the House Government Oversight and Reform Committee, he voiced shock over the current turn of events and called conditions deplorable.

He said he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief." Greenspan also blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

He said a necessary condition for the crisis to end will be a stabilization in home prices, but he said that is not likely to occur for "many months in the future."

When home prices finally stabilize, Greenspan added, then "the market freeze should begin to measurably thaw, and frightened investors will take tentative steps toward re-engagement with risk."

Greenspan said until that occurs, the government is correct to move forward aggressively with efforts to support the financial sector. He called the $700 billion rescue package passed by Congress on Oct. 10 "adequate to serve the need" and said its impact is already being felt in markets.

In his written testimony, Greenspan did not specifically address criticism he has received about being partly to blame for the current crisis.

Greenspan's critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of those mortgages and rising defaults a year ago that triggered the current crisis.

In his testimony, Greenspan put the blame for the subprime collapse on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.

"It was the failure to properly price such risky assets that precipitated the crisis," he asserted.

Meanwhile, Neel Kashkari, the interim head of the government's $700 billion rescue effort, and other government officials were going before the Senate Banking Committee to lay out their plans for implementing the massive program.

From the Associated Press



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