Main Street

Lights Out, Nobody Home

Former Federal Reserve Board Chairman Alan Greenspan testified this morning before the Financial Crisis Inquiry Commission (FCIC) absolving himself and the Fed from any responsibility for failing to avert the crisis. Financial crises are “inherently unforeseeable,” Greenspan said, adding that regulators are particularly incapable of foreseeing them.

Members of the Commission looked on incredulously as Greenspan delivered his opening remarks.

Here’s a clip:

Amazing. (Links to the full session are included at the end of this post)

Greenspan headed the Federal Reserve from August 1987 through January 2006, and during his tenure helped engineer the deregulation of Wall Street and the unrelenting expansion of a stock market bubble and then a massive housing bubble.

Two of the Federal Reserve’s core responsibilities are regulatory supervision and oversight of bank holding companies, and preventing or at least minimizing the growth of asset bubbles. It doesn’t take a genius to see that Greenspan failed to do either. But he accepts no responsibility, preferring instead to blame virtually everyone else.

Who was to blame for the excessive risks to the banks posed by the explosion of securitized mortgage products? Greenspan said to blame European investors for wanting to buy these increasingly risky products. Oh yeah, blame Fannie Mae and Freddie Mac too, Greenspan said — although, as Commission Chairman Phil Angelides pointed out between 2002 and 2005 between 59 and 92 percent of the securitized mortgage market was controlled by the private banks, not Fannie and Freddie.

How was it that the Fed failed to see the increasing risks posed by the securitized mortgage products and their associated derivatives instruments (particularly credit default swaps)? It wasn’t Fed regulators’ fault, Greenspan said, it was the fault of the credit rating agencies for giving these products AAA ratings.

‘Kool-Aid’ anyone?

And anyway, bank regulation and supervision is “inherently a rather difficult job,” Greenspan said. Perhaps, but nevertheless it is their job, albeit one they chose not to do.

Commission member Brooksley Born summed up her assessment:

“The Fed utterly failed to prevent the financial crisis,” Born said. “The Fed failed to prevent the housing bubble, the predatory housing crisis and failed to recognize the systemic risk posed by an unregulated over-the-counter derivatives market.”

In response Greenspan blamed some unspecified “flaw in the system,” adding “I really fundamentally disagree with your point of view.”

Greenspan’s disagreements with Born go back to the 1990s. Born was chairperson of the Commodity Futures Trading Commission from 1996 to June 1, 1999. Concerned about the lack of transparency and the risks she saw growing in the unregulated derivatives markets, in May 1998 she proposed that the CFTC be given oversight authority over the non-exchange-traded derivatives, including credit default swaps.

But Greenspan opposed Born’s proposal, and he was joined by Secretary Robert Rubin and Deputy Lawrence Summers at Treasury, as well as Securities and Exchange Commission (SEC) chairman Arthur Levitt, Jr. Not only did they dismiss her concerns regarding derivatives risks, they attacked Born’s regulatory plan, saying it would increase trading costs, thwart “innovation” and hamper “competition”. The plan was rejected and Born soon left the CFTC. More than ten years later, these derivatives still lack regulatory oversight and transparency, having already contributed to the financial meltdown and the economic free-fall of the Great Recession.

Perhaps fittingly, as the Commission was nearing the end of its session with Greenspan, there was a power failure and the lights went out. No matter. Mr. Greenspan went on in the dark — where he’s always been and still remains.

Digital video of Greenspan’s testimony is posted: Part 1 and Part 2.

Tags: Federal Reserve