Greenspan’s apology: Still MIA

By Felix Salmon
September 9, 2009
admitted he was "partially wrong" in deregulating the financial sector. But he doesn't seem to be able to take the next logical step:

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Alan Greenspan has admitted he was “partially wrong” in deregulating the financial sector. But he doesn’t seem to be able to take the next logical step:

The former Fed chief said the current economic crisis was a “once in a century type of event”, and one that he did not expect to witness.

Blamed by some for not doing more to prevent the crisis, Mr Greenspan denied any responsibility for the problems gripping the global economy.

“It’s human nature, unless somebody can find a way to change human nature, we will have more crises and none of them will look like this because no two crises have anything in common, except human nature.”

Well yes, I suppose that there will always be financial crises, in much the same way that there will always be homicides. But the inevitability of homicide doesn’t mean that murderers can’t be held responsible for causing them.

Financial crises, no matter how inevitable, have causes, and certain people caused this one. Greenspan was one of those people. It’s about time he admitted it, and apologized.


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Good point, Felix. That would accomplish a lot…

Posted by Phil | Report as abusive

Perhaps his conversion/confession is waiting for his last minutes on earth…when, as Carl Spackler put it “you will receive total consciousness”

Posted by Griff | Report as abusive

Mind as well as Hank Paulson to the list.

he is blaming human nature for crises and rightly so. why should HE apologize?


“If you put the power into the hands of people, very smart people, but if you ask them to do more than is possible I think they will create problems for the system,” said Greenspan, who said in congressional testimony in October that “a flaw” in the ideology of free-market risk management contributed to the the “once-in-a-century” credit crisis.

Oversight Committee Chairman Henry Waxman: I will start the questioning. Dr. Greenspan, I want to start with you. You were the longest serving chairman of the Federal Reserve in history and during this period of time were perhaps the leading proponent of deregulation of our financial markets. Certainly you were the most influential voice for deregulation. You have been a staunch advocate for letting markets regulate themselves. Let me give you a few of your past statements. In 1994 you testified at a congressional hearing on regulation of financial derivatives. You said there’s nothing involved in federal regulation which makes it superior to market regulation. In 1997, you said there appears to be no need for Government regulation of off exchanged derivative transactions. In 2002 when the collapse of Enron led to renewed congressional efforts to regulate derivatives, you wrote to the Senate, we do not believe a public policy case exists to justify this Government intervention and earlier this year you wrote in the Financial Times, bank loan officers in my experience know far more about the risks and workings of their counterparties than do Bank regulators. My question for you is simple, were you wrong?

Alan Greenspan: I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was capable of protecting their own shareholders and the equity in the firms, and it has been my experience, having worked both as a regulator for 18 years and similar quantities in the private sector, especially 10 years at a major international bank, that the loan officers of those institutions knew far more about the risks involved and the people to whom they lent money than I saw even our best regulators at the fed capable of doing. So the problem here is something which looked to be a very solid edifice and indeed a critical pillar to market competition and free markets did break down and I think that shocked me. I still do not fully understand why it happened and obviously to the extent that I figure out where it happened and why, I will change my views. As the facts change, I will change.

Oversight Committee Chairman Henry Waxman: I’m going to interrupt you. The question I have for you is, you had an ideology. This is your statement. “I do have an ideology. My judgment is that free competitive markets are by far the unrivaled way to organize economies. We have tried regulation, none meaningfully worked.” That was your quote. 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. Do you feel that your ideology pushed you to make decisions that you wish you had not made?

Alan Greenspan: I found a flaw in the model that I perceived as the critical functioning structure that defines how the world works”

Posted by Craig Teuber | Report as abusive

So, if Mr Greenspan caused the problems,…well his successor doesn’t seem to be undoing his handywork. So exactly how is a recovery going to be realised?

This is the largest credit bubble that’s ever gone pop and the government’s predisposition to borrow more and run unprecedented budget deficits isn’t going to fix the problems debt created in the first place. It will just draw out the pain.

Posted by Justin | Report as abusive

“once in a century” is a strange way of book keeping. There has been at least three crisis this serious the last 101 years, counting from 1907 and ending 2008. It reminds me very much of some slides promoting a link note to investors, very intolerant to increases in the spread, and conveniently enough the time line started sometime in 2001 just after the spread had decreased from a spike.

Posted by Gaute | Report as abusive

Felix, you are right to point to human nature, but your homocide analogy could be improved.

Homocide is a fact of life, and so are guns. But Greenspan wanted no regulation of weapon sales or ownership, and he wanted to disband the police force, because the best judge of public safety is, of course, is the generalized wisdom of the public at large.

Yet it was precisely Greenspan’s job to be the public safety regulator. His job was to remember human nature and act as a curb on the predictable problems that could result from human behavior. Instead he acted as the president of the Chamber of Commerce.

He does owe us an apology.

Posted by Dollared | Report as abusive

What exactly were the “deregulations” that Greenspan was responsible for?

Sure, keeping interest rates too low for too long. But deregulation?

Posted by Chase | Report as abusive

1. Repeal of Glass-Steagall, for which he was on board (feel free to fact-check it…I don’t imagine his opinion went without notice)
2. Brooksley Born was in favor of regulatory oversight for the young but building CDS markets in the late 1990s. Rubin + Greenspan = Brooksley was over-ruled

Greenspan has been on record, multiple times, that markets are self-regulating and self-correcting, and the invested interests will keep the animal spirits behaved.

He also thoughts Americans would do well in pursuing more Adjustable-rate mortgages, given a speech during 2003 I believe.

Posted by Griff | Report as abusive

if you’re blaming the financial crisis solely on the repeal of Glass-Steagall and lack of regulatory oversight in the OTC markets then you should probably check a few more sources …

Posted by Chase | Report as abusive

Those were simple examples of a few ideas where Greenspan got it wrong. Here is another…several years ago the SEC thought it a good idea to allow additional leverage at the IB broker/dealers. That didn’t work too well. There are myriad sources for the debacle, of course…and yet, a recurring theme is that certain aspects of the financial industry show a reckless abandon / disregard when billions stand to be made, only to cower like children when the landlord comes to get paid.

Citigroup is example A,B,C and D of what went wrong when Glass-Steagall was repealed. That act went into place AFTER the fact, for the record…so Sanford Weill actually brokered a deal and THEN the law was changed. Nothing more American than that, of course.

The big banks/brokers continued to argue for, and generally received, lighter regulation. Yes, the light-touch regulations that lead to innovative designs like CDO-squared. Brilliant people may have devised them, but I give them no leeway when these busted vehicles were sold to simpletons in China or Iceland, of all places.

What happened when the equity markets crash in 1987…portfolio insurance gone horribly wrong.

Back in 1998, Greenspan + Rubin arranged for the systematic delevering of LTCM. Which proves one point: Wall Street never learns nor listens from history. The only guarantee we can carry forward is in another 15-20 years there is bound to be yet another cycle.

And who gets hurt: not the big players or big traders, but the innocents like folks in the massive operations dept or working the cage for daily settlements.

Posted by Griff | Report as abusive

PS: I am not rabid anti-Wall Street nor anti-capitalist, despite what these postings suggest. Yet it is quite amazing to observe how self-congratulatory the industry had become: hiring largely top-flight quality talent, only to subsequently flounder from boom to bust every 5-15 years. It just does not add up…too many smart people at these firms. If you continue to hire the best/brightest…just how in the hell can it be perpetually & cyclically wrong almost to the “T”

I don’t care how brilliant the PhD, MBA and mathematicians are…2 + 2 = 4. Always has, always will.

Posted by Griff | Report as abusive

Do you believe that Glass-Stegall or any other repealed regulation would have wholly prevented the financial collapse? I doubt that anyone could make that claim and be taken seriously because even though it would have unquestionably helped matters, it could not have stopped it cold.

In my opinion this crisis was caused by a decade of historically low interest rates combined with government spawned incentives to spur mortgage lending created an atmosphere where risks in the housing market were skewed dangerously low. I think it would be pretty hard to argue with that statement.

That isn’t to say that there is no place for regulation, though I think efforts would be better placed in improving transparency. Rather, that if the goal is to stop the business cycle from being as severe as it has been this time around around then we need to stop the government from intervening to skew risk assessment and allow interest rates to float appropriately without fed intervention in all but the most extreme cases.

It seems the current administration has all but rejected both proposals however and is keeping its gloves on in terms of regulation while also reserving the right to intervene to further skew the markets. But at least bonuses will be lower!

Posted by Chase | Report as abusive

I’d agree with the below statement, but mark an addendum that in broad terms, credit / asset markets were at historical lows as measured by risk premia. IE, I can recall a FFELP student loan ABS bond (5yr avg life) which priced ~ LIBOR + 5bps…just ridiculous. Corporate markets were similarly distorted, in particular bank & finance-related names.

“In my opinion this crisis was caused by a decade of historically low interest rates combined with government spawned incentives to spur mortgage lending created an atmosphere where risks in the housing market were skewed dangerously low. I think it would be pretty hard to argue with that statement.”

As for the political solutions presently in place…what’s a catastrophe followed by another disaster ?? Frank, Pelosi, Reid…what a train wreck.

Posted by Griff | Report as abusive

Totally agree. The next couple years should be interesting.

Posted by Chase | Report as abusive