Greenspan Admits Free Market Ideology Flawed

Former Federal Reserve Chairman Alan Greenspan told a House committee Thursday that the banking and housing crisis is a "once-in-a-century credit tsunami." When asked if his ideology pushed him to make bad decisions, Greenspan said he found a "flaw" in his governing ideology that has led him to re-examine his thinking.

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STEVE INSKEEP, Host:

The man who always seemed to be right when he was overseeing our economy now says he might have been wrong. Alan Greenspan, former chairman of the Federal Reserve, testified before lawmakers about the causes of the financial crisis. And he says, markets have been hit by a crisis worse than anything he could have imagined. He still doesn't fully understand why. NPR's Brian Naylor reports.

BRIAN NAYLOR: The man once known as the maestro for his direction of the nation's economy as Fed chairman sat for four long hours yesterday, watching lawmakers who once cheered his performances turn into harsh critics. Testifying before the House Oversight Committee, Greenspan didn't down play the severity of the crisis in the nation's markets.

M: We are in the midst of a once-in-a-century credit tsunami. Central banks and governments are being required to take unprecedented measures.

NAYLOR: Under questioning from Democrats on the panel, Greenspan conceded he might have been, as he put it, partially wrong in not moving to regulate trading of some derivatives that are among the root causes of the credit crisis. He also admitted his free market ideology may be flawed. This exchange with committee chairman, Democrat Henry Waxman of California, verged on the metaphysical.

NAYLOR: You found a flaw in the reality...

M: Flaw in the model that I perceived is a critical functioning structure that defines how the world works, so to speak.

NAYLOR: In other words, you found that your view of the world, your ideology was not right. It was not working.

M: How it - precisely. That's precisely the reason I was shocked, because I've been going for 40 years or more with very considerable evidence that it was working exceptionally well.

NAYLOR: As for criticism that Greenspan let interest rates remain too low for too long, helping fuel a housing bubble, Greenspan said it was investors' failure to properly factor in the risk that housing prices might fall that led to the credit freeze. Greenspan testified along with former Treasury Secretary John Snow and SEC chairman Christopher Cox. Democrat John Yarmuth of Kentucky said the three reminded him of an ill fated baseball player.

NAYLOR: I feel like I'm looking out there at three Bill Buckners, the first baseman for the Red Sox who let the ball go through his legs and cost his team the championship. All of you let the ball go through your legs, and you didn't want to let the ball go through your legs. You didn't try to let the ball go through your legs but it got through.

NAYLOR: Republican William Sali wanted to know the consequences of the meltdown.

NAYLOR: What do you say to the people in Idaho who lost their investment or the people that have caused this, is somebody going to go to jail?

NAYLOR: SEC chairman, Cox said there was no question that, as he put it, somewhere in this terrible mess many laws were broken. Cox said the SEC has 50 investigations under way into subprime lending, but Cox said there were other things equally as important as bringing charges.

M: Cleaning up the mess through law enforcement after the fact, while important, is not ideal. And the best thing that we can do, of course, as many of you are focused on, this hearing is focused on this, is to infer lessons from what happened and prevent anything like this - this astonishing harm from happening now.

U: The chairman...

NAYLOR: Cox suggested Congress call for a select committee to address the financial crisis. Greenspan said more regulation is required, though he continues to believe that as he put it, whatever changes are enacted will pale in comparison to changes the markets themselves have already made. Brian Naylor, NPR news, the Capitol.

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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