The blaming game...

Alan Greenspan, once regarded as the hero of the financial system before its implosion in 2008, recently had to appear before a Financial Crisis Inquiry Commission (FCIC) meeting on Capitol Hill explaining his role, or rather the lack of preventing an economic meltdown at the helm of the Federal Reserve. Financial Times reported on the events of this dramatic hearing:

Phil Angelides, who leads the FCIC, asked the former chairman of the Federal Reserve if the Bank’s failure to curb subprime lending as the housing bubble unfolded fell into the category of “oops”. “My view is, you could have, you should have and you didn’t,” Mr Angelides said.

Mr Greenspan, 84, led the Fed between 1987 and 2006 and has been criticised for helping foster the conditions that led to the collapse of US mortgage markets and, ultimately, the global financial crisis two years after his departure.

“In the business I was in, I was right 70 per cent of the time, but I was wrong 30 per cent of the time”, Greenspan said. “What we tried to do was the best we could with the data that we had.”

Mr Greenspan said it was likely that Congress would have blocked any attempt by the Fed to rein in the subprime mortgage industry, since it was bolstering home ownership across the country. He said lawmakers were now suffering from “amnesia” about their stance on the issue.

In his opening statement, Mr Greenspan said there was no evidence that Fed monetary policy during his tenure contributed to the housing bubble. He argued that it was low long-term interest rates, not the short-term rates that the central bank controls directly, that nourished the proliferation of subprime mortgages. “The house-price bubble, the most prominent global bubble in generations, was caused by lower interest rates but . . . it was long-term mortgage rates that galvanized prices, not the overnight rates of central banks, as has become the seeming conventional wisdom,” Mr Greenspan said.

He also noted that the Fed did not regulate many of the independent mortgage companies that issued subprime loans during the bubble, and lacked enforcement powers to protect consumers more aggressively.

Mr Greenspan said higher capital and liquidity requirements for banks and increased collateral requirements for financial products would mitigate future crises.

“The next pending crisis will no doubt exhibit a plethora of new assets which have unintended toxic characteristics, which no one has heard of before, and which no one can forecast today,” Mr Greenspan said. “But if capital and collateral are adequate, and enforcement against misrepresentation is enhanced, losses will be restricted to equity shareholders . . . Taxpayers will not be at risk.”