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