Greenspan says crisis left him in 'shocked disbelief'

Alan Greenspan, the formerchairman of the US Federal Reserve, has dramatically repudiated large parts of his laissez-faire ideology and joined the chorus of voices saying that the credit crisis reveals a need for more regulation of the finance industry.

Returning to Capitol Hill to testify before Congress, where lawmakers were once in awe of his intellect and his reputation as a steward of theeconomy, a bewildered-sounding Mr Greenspan admitted that his view of the world had been flawed.

Self-regulation by Wall Street had failed, he said. "Those of us who have looked to the self-interest of lendinginstitutions to protect shareholder's equity – myself especially – are in a state of shocked disbelief."

And he went on: "I found a flaw in the model that I perceived is thecritical functioning structure thatdefines how the world works. That's precisely the reason I was shocked... I still do not fully understand why it happened and obviously to the extent that I figure where it happened and why, I will change my views. If the facts change, I will change."

The 82-year-old former chairman, who ran the Fed for 18 years under four presidents before retiring in 2006, has seen his reputation torn to shreds by those who accuse him of havingcontributed to a credit bubble which, on bursting, has brought the world to the brink of economic calamity.

The housing market was inflated tounsustainable levels, in part by Mr Greenspan's keeping interest rates too low for too long, his critics argue. And he rejected calls as far back as 2000 to beef up the Fed's regulation of themortgage lending business in the US, where so-called "sub-prime" borrowers were handed home loans theycouldn't afford by predatory lenders who operated without strong oversight.

Those sub-prime loans wereparceled up into mortgage-backedsecurities and other derivatives, which were sold throughout the world – and which have subsequently collapsed in value as US borrowers defaulted on mortgage payments in record numbers and as house prices slumped.

The explosion of these derivatives markets was based on flawed assumptions, by traders and their counterparties, about the levels of risk that they were taking, Mr Greenspan said. "The whole intellectual edifice collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria."

Although the former Fed chairman said he had warned as far back as 2005 that markets might be underpricing risk, his testimony yesterday was a major departure – following many months in which Mr Greenspan has declined to identify mistakes he made during his tenure and has insisted that he could have done little to prick a bubble in the credit markets in any case.

Yesterday he called for better oversight of the financial markets, and in particular those issuing mortgage-backed securities and other derivatives. "As much as I would prefer itotherwise, in this financial environment I see no choice but to require that all securitisers retain a meaningful part of the securities they issue," he said.

"This will offset in part market deficiencies stemming from the failures of counterparty surveillance. There are additional regulatory changes that this breakdown of the central pillar of competitive markets requires in order to return to stability, particularly in the areas of fraud, settlement, and securitisation." And it was not just Mr Greenspan who was taking a different tone at yesterday's House of Representatives oversight committee meeting. Committee members showed substantially less reverence for the former Fed chief and his views than members of Congress did in the days when he ruled the Fed and was near-deified for his apparent ability to keep the US economy on an even keel despite shocks such as the stock market crash of 1987 or the terror attacks of 2001.

Henry Waxman, the oversight committee chairman, demanded that Mr Greenspan take his share of the blame for the current crisis.

"For too long, the prevailing attitude in Washington has been that themarket always knows best," he said. "The Federal Reserve had the authority to stop the irresponsible lending practices that fuelled the sub-prime mortgage market, but its long-time chairman rejected pleas that he intervene. The Securities and Exchange Commission had the authority toinsist on tighter standards for credit rating agencies, but it did nothing. The Treasury department could have led the charge for responsible oversight of financial derivatives, but instead, it joined the opposition. The list of regulatory mistakes and misjudgements is long, and the cost to taxpayers and our economy is staggering."

Christopher Cox, chairman of the SEC, was also on the panel testifying yesterday, as was John Snow, who was Treasury secretary until 2006.

Mr Cox said that the SEC had been hampered in its oversight of Wall Street firms by the lack of adequate legislation defining its role, and Mr Snow blamed Congress for ignoring the Bush administration's warnings about the systemic risk posed by mortgagesecuritisation giants Fannie Mae and Freddie Mac.

Fannie and Freddie had a government mandate to promote home ownership, and drove down mortgage rates by guaranteeing or buying half of all US mortgages – but spiralling losses forced the federal government tonationalise them earlier this year.

Mr Greenspan addressed the root cause of the housing bubble and theexplosion of risky sub-prime mortgages. "We didn't know that a deterioration in standards was occurring until 2005. The real toxic mortgages occurred with the increase in securitisation and the huge demand from abroad, and to the extent that Fannie and Freddie were involved, from them as well."

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Arts and Entertainment
British musician Mark Ronson arrives for the UK premiere of the film 'Mortdecai'
music
Voices
Winston Churchill, then prime minister, outside No 10 in June 1943
voicesA C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
News
i100
Sport
footballBrighton vs Arsenal match report
Arts and Entertainment
Benedict Cumberbatch has spoken about the lack of opportunities for black British actors in the UK
film
News
people
News
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us