Greenspan: No Longer a Willing Crisis Fall Guy

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Early on, it seemed that Alan Greenspan, the former chairman of the Federal Reserve, was willing at least in part to take the heat for the financial crisis. He didn’t regulate banks more because he assumed bankers would act in their and their firm’s best long-term interest and not just do what would provide them the best shot at an eight figure bonus that year. My bad, said Greenspan. We agreed that Greenspan the Maestro had royally violated the canine on financial regulation and included him on our list of who’s to blame for the financial crisis.

But, it appears, Greenspan no longer wants to appear on lists like ours.

He has recently been backing away from taking credit for the financial crisis. He recently wrote a Brookings paper blaming low capital requirements (something not set by the Fed) and not regulation or monetary policy for the financial crisis. He also said he, too, warned people that a housing bubble might be forming. (Krugman has a good takedown of that excuse.)

On Wednesday morning testifying in front of the Financial Crisis Inquiry Commission Greenspan stepped up his don’t blame me response to the financial crisis. That appears to be Huff Po‘s reading of this the hearings as well. Instead, he said lawmakers were to blame for pressuring the Fed to boost lending. He said rating agencies were a leading cause of the financial crisis. Financial executives failed to understand the risk of their mortgage positions. And while he was blaming others Greenspan didn’t want us to forget those damn people in East Germany who wanted their freedom. Shame on them.

It was the global proliferation of securitized U.S. subprime mortgages that was the immediate trigger of the current crisis.  But its roots reach back, as best I can judge, to 1989, when the fall of the Berlin Wall exposed the economic ruin produced by the Soviet system.  Central planning, in one form or another, was discredited and widely displaced by competitive markets.

Yes, Greenspan said he made some mistakes. He said about 30% of the things he did while in government were mistakes, but what was included in that 30% Greenspan didn’t really say. And consumer protection was certainly not one of them. Greenspan says he consistently voted for more consumer protections.

For me, the most anticipated portion of the hearing was “The Thrilla of Non-Plain Vanilla Derivatives.” This was the long awaited rematch of the blond knockout Brooksley Born and the below the belt (because of his now pronounced hunch) brawler Alan the Eliminator (of meaningful regulation that is). If you don’t know what I am talking about, check out this excellent episode of Frontline. Here’s the back story: In the late 1990s, Born was the head of the Commodity Futures Trading Commission and warned that over the counter derivatives, which includes credit default swaps, posed a risk to US markets and economy. She urged Congress to allow her to regulate the OTC derivatives market to eliminate the risk of some firm making wild bets and then having to be bailed out by Uncle Sam. Nonetheless, a group of Washington insiders lead by Greenspan put the kibosh on any hope Born had on reigning in OTC derivatives. Hello, AIG.

Fast forward to today. Born is now one of the investigators on the Financial Crisis Inquiry Commission and Greenspan stands as one of the accused causes. Here’s Born’s right hook:

“You appropriately argue that the role of regulation is preventative,” she said. “But the Fed utterly failed to prevent the financial crisis. The Fed and other banking regulators failed to prevent the housing bubble, they failed to prevent the predatory lending scandal, they failed to prevent our biggest banks and holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts.”
“Didn’t the Federal Reserve fail to meet its mandates, fail to meet it responsibilities?”

Good stuff. But Greenspan came prepared, and was able to bob and weave around most of Born’s jabs. He scoffed at her notion that his Ayn Rand views on the market influenced financial regulation.  He enforced the laws that were passed even if he would have written then differently. But Born did land one blow. Born brought up that Greenspan had led the effort to squash the regulation of OTC derivatives. Had CDS been regulated Uncle Sam might not have had to shell out $180 billion bailing out AIG.

Greenspan countered that AIG’s failure was that of its investment committee and not the CDS market. Even if CDS were regulated, AIG could have used some other form of insurance product to allow others to place huge bets against mortgages. Actually, no, Born said. Other insurance contracts would have been regulated. AIG would have put up capital to write that insurance, and since it clearly didn’t have the capital to back up those bets, they never would have been place. Mortgage bond insurance would have been harder to get since AIG was pretty much the only game in town when it came to the really junky stuff.  Perhaps hundreds of billions of dollars in bad loans wouldn’t have been written, and Greenspan and Born would have never had to have a rematch. So Born won at least one round, if not the bout.

BONUS: Here’s the Journal’s take on the Greenspan hearing from the end of their live blog:

In the end, it’s not clear if Greenspan has been able to convince the commission that the Fed’s hands were tied in stopping the subprime mortgage meltdownProbably his most interesting addmission was how much political pressure the Fed faced in deciding whether to clamp down on subprime lending. In this case, amid a massive push for increased home ownership, the Fed decided not to intervene. Greenspan essentially puts much of the blame on Congress.