Greenspan Takes Some Blame

On October 23, 2008, former Fed Chairman Alan Greenspan testified before a Congressional committee to discuss the current economic crisis in the country. He admitted that mistakes during his appointment worsened the current economic crisis. A quote from his testimony stated "those of us who have looked to the self-interest of lending institutions to protect shareholders' equity... are in a state of shocked disbelief."

Once appointed to his position in 1987, Greenspan immediately began pushing Congress to repeal the law implemented during the Depression that prevented banks from competing with investment banks in underwriting stocks and bonds. When Congress hesitated, Greenspan used the Federal Reserve's authority to allow banks to circumvent the law. Greenspan also opposed efforts by the Securities and Exchange Commission (SEC) to initiate modest regulation of the $1 trillion hedge fund industry.

Greenspan instituted the deregulation of the banking and financial system and the institution of mortgage ARMs in 2004. Greenspan admitted during his testimony that deregulation didn't really work and that it was flawed. Greenspan admitted that he put too much faith in the power of the free market and failed to foresee the self-destructive power of reckless mortgage lending.

However, Greenspan also placed blame on Wall Street companies that bundled subprime mortgages into 100 million dollar packages and sold them as mortgage backed securities. Global demand for the mortgage securities was so high, Greenspan said, that Wall Street companies pressured lenders to lower their standards and produce more "paper".

Greenspan also explained during his testimony that he did not anticipate the massive housing bust because we (he and other top economists) cannot see events that far in advance. "Greenspan explained that even after he realized there was a bubble, he never expected housing prices to decline so dramatically, because we had never had a nationwide decline in housing prices in the past.

Well Mr. Greenspan, if you are in disbelief how do you think the rest of the country feels.