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OCTOBER 24, 2008
Greenspan Admits Errors to Hostile
House Panel
By KARA SCANNELL and SUDEEP REDDY
Alan Greenspan, lauded in Congress while the economy boomed, conceded under harsh
questioning from lawmakers that he had made mistakes during his long tenure as Federal
Reserve chairman that may have worsened the current slump.
In a four-hour appearance before the House Oversight Committee Thursday, Mr.
Greenspan encountered legislators who interrupted his answers, caustically read back his
own words from years ago, and forced him to admit that, at least in some ways, his
predictions and policies had been wrong.
Former Fed Chairman Alan Greenspan said he was "shocked" by the breakdown in the
credit system and told Congress the crisis was once in a century.
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Former Federal Reserve Chairman Alan Greenspan testifies during a House Oversight
and Government Reform Committee hearing on Capitol Hill Thursday.
Returning to Capitol Hill amid a financial crisis rooted in mortgage lending, Mr.
Greenspan said he had been wrong to think banks' ability to assess risk and their selfinterest would protect them from excesses. But the former Fed chairman, who kept shortterm interest rates at 1% for a year earlier this decade, said no one could have predicted
the collapse of the housing boom and the financial disaster that followed.
Lawmakers weren't buying his explanations. "You had the authority to prevent
irresponsible lending practices that led to the subprime-mortgage crisis. You were
advised to do so by many others. And now our whole economy is paying its price,"
said Rep. Henry Waxman (D., Calif.), chairman of the House committee.
Lawmakers read back quotations from recent years in which Mr. Greenspan said there's
"no evidence" home prices would collapse and "the worst may well be over."
The 82-year-old Mr. Greenspan said he made "a mistake" in his hands-off
regulatory philosophy, which many now blame in part for sparking the global
economic troubles. He quoted something he had written in March: "Those of us who
have looked to the self-interest of lending institutions to protect shareholder's equity
(myself especially) are in a state of shocked disbelief."
He conceded that he has "found a flaw" in his ideology and said he was "distressed
by that." Yet Mr. Greenspan maintained that no regulator was smart enough to
foresee the "once-in-a-century credit tsunami."
The hearing made clear how far the 18-year central banker's reputation had fallen from
the days when he was hailed for his stewardship in keeping inflation low, holding growth
up and helping pull the world through financial crises, including the Asian crisis and
other turmoil a decade ago.
Greenspan: From the Archives
When Alan Greenspan retired in 2006 after 18½ years as chairman of the Federal
Reserve, his economic legacy seemed secure: Inflation and unemployment were lower
than when he took office, and during his tenure, the U.S. experienced just two mild
recessions and its longest expansion on record. But today, that legacy is under fire amid
the housing slump and financial crisis. Here is a look back at Greenspan as covered in the
Journal:
CHECK THESE OUT, SOME GOOD HISTORY!!
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Greenspan Defends His Legacy
04/08/08
The Roots of the Mortgage Crisis (By Alan Greenspan)
12/12/07
Greenspan Book Criticizes Bush, Republicans
09/15/07
Greenspan's Legacy Rests on Results
01/31/06
How Alan Greenspan Came to Terms With the Markets
05/08/00
Setting Fed's Policy, Chairman Relies On His Own Judgment
01/27/97
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'Irrational Exhuberance' Concerns Greenspan
12/06/96
Fed Shows Concern Over Housing
05/19/05
Two and a half years after Mr. Greenspan left office, Congress is drawing plans to
remake global financial regulation with the kind of tight government hand that he
long opposed. At the same House hearing, Securities and Exchange Commission
Chairman Christopher Cox, himself a longtime free-market Republican, said he
supported merging his agency with the Commodity Futures Trading Commission,
creating a beefed-up supercop to police certain previously unregulated financial
products.
Amid the barrage of questions, Mr. Greenspan dodged and weaved. He would begin
meandering responses in the elaborate phraseology that once served him so well, only to
be cut off as lawmakers sought to use their brief question time for sharper attacks.
In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he
knew there was a housing bubble and when he told the public about it. He answered that
he never anticipated home prices could fall so much. "I did not forecast a significant
decline because we had never had a significant decline in prices," he said.
Mr. Greenspan's confidence in the resilience of home prices -- shared by most in the
industry at the time -- became a critical forecasting error. The belief spurred more
mortgage underwriting because lenders assumed that borrowers living on the edge
could always refinance or sell their homes for a profit if they ran into trouble.
Instead, with home prices now falling, hundreds of thousands of homeowners are
facing foreclosure. Prices nationwide have fallen nearly 20% since their 2006 peak,
and many economists foresee a further decline of 10% or more in the next year.
The difficulties of forecasting served as a key defense for Mr. Greenspan. The Federal
Reserve, with its legions of Ph.D. economists, has a better forecasting record than the
private sector, he said, but that's still not enough to prevent every problem. "We were
wrong quite a good deal of the time," he said. Forecasting "never gets to the point where
it's 100% accurate."
Subprime mortgages led to a global economic crisis in considerable part because of
securitization, in which the home loans were sliced up, packaged into securities and sold
off to investors all around the world. Anticipating such a crisis is "more than anybody is
capable of judging," Mr. Greenspan said.
If the best experts were not able to foresee the development, "I think we have to ask
ourselves, 'Why is that?'" Mr. Greenspan said. "And the answer is that we're not
smart enough as people. We just cannot see events that far in advance."
He continued, "There are always a lot of people raising issues, and half the time
they're wrong. The question is what do you do?"
Lawmakers, stung by having to put $700 billion of taxpayer money on the line to rescue
the financial system, were unmoved throughout the hearing, and eager to make their own
points about the situation.
Rep. John Yarmuth, Democrat of Kentucky, hit Greenspan close to home, calling
the avid baseball fan one of "three Bill Buckners." That was a reference to the
Boston Red Sox first baseman whose flubbed handling of a routine grounder cost
his team the 1986 World Series (ouch!!). Former Treasury Secretary John Snow
and Mr. Cox, who sat alongside Mr. Greenspan, also got tagged with that
comparison.
Lawmakers homed in on a warning the late Fed governor Edward Gramlich gave Mr.
Greenspan in 2000 about potential problems in lending practices. Mr. Greenspan said he
agreed but added that if the matter was of such high concern, a Federal Reserve
subcommittee would have presented it to the full board. He said that never occurred.
The former Fed chief also said he was often following the "will of Congress" during
his long tenure and did "what I am supposed to do, not what I'd like to do." (SO
WHAT ABOUT THE FED’S TREASURED INDEPENDENCE?????)
Mr. Greenspan has spent much of this year defending his record at the Fed, trying to take
apart arguments to show how his decisions were far less significant than outside forces in
causing the crisis.
The central bank is blamed for too vigorously spurring home buying through its low
short-term interest-rate targets, which were initially set to fight the economic slump
after the dot-com bubble burst in 2000-01. Mr. Greenspan maintains that the
development of China and other factors fostered low rates -- around the globe and
not just in the U.S. -- contributing to a housing boom that was world-wide.
Lawmakers took Mr. Greenspan to task for his advocacy of credit-default swaps, an
unregulated kind of insurance contract that can help investors protect themselves against
another party's bankruptcy. Credit-default swaps were also used as a way of taking risks
and are widely blamed for adding to financial-market instability. Rep. Waxman asked
pointedly, "Were you wrong?"
Mr. Greenspan said, "Partially." While he cautioned the lawmakers against
excessive regulation, he said credit-default swaps "have serious problems" and,
after some pointed questions, agreed they should be subject to oversight. (NOW
THAT’S GOING OUT ON A LIMB!)
The treatment was a striking contrast with one of Mr. Greenspan's last appearances
before Congress as Fed chairman, on Nov. 3, 2005. "You have guided monetary
policy through stock-market crashes, wars, terrorist attacks and natural disasters,"
Rep. Jim Saxton (R., N.J.) told him then. "You have made a great contribution to
the prosperity of the U.S. and the nation is in your debt." (SO JIM WHEN FROM
A BULL TO A BEAR WHEN IT COMES TO AG!!!)
—Brian Blackstone contributed to this article.
Write to Kara Scannell at kara.scannell@wsj.com and Sudeep Reddy at
sudeep.reddy@wsj.com