Former Federal Reserve chairman Alan Greenspan has conceded that the global financial crisis has exposed a “mistake” in the free market ideology that guided his 18-year stewardship of US monetary policy.
A long-time cheerleader for deregulation, Greenspan admitted to a congressional committee on Thursday that he had been “partially wrong” in his hands-off approach toward the banking industry and that the credit crunch had left him in a state of shocked disbelief.
“I have found a flaw,” he said, referring to his economic philosophy. “I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
It was the first time the man hailed for masterminding the world’s longest postwar boom has accepted any culpability for the crisis that has engulfed the global banking system.
During a feisty exchange on Capitol Hill, he told the House of Representatives oversight committee that he regretted his opposition to regulatory curbs on certain types of financial derivatives that have left banks facing billions of dollars worth of liabilities.
He said: “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”
In remarks before the House of Representatives, Greenspan, who retired in 2006, called the crisis a “once-in-a-century credit tsunami.”
He suggested his trust in the responsibility of banks had been misplaced.
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity [myself especially] are in a state of shocked disbelief,” he said.
The committee’s Democratic chairman, Henry Waxman, pressed him: “You found that your view of the world, your ideology, was not right, it was not working?”
Greenspan agreed: “That’s precisely the reason I was shocked, because I’d been going for 40 years or so with considerable evidence that it was working exceptionally well.”
Waxman cited a series of public statements by Greenspan saying the market could handle regulation of derivatives without government intervention.
“My question is simple: Were you wrong?” Waxman asked.
Greenspan said he was “partially” wrong in the case of credit default swaps, complex trading instruments meant to act as insurance against default for bond buyers.
While he was once hailed as one of the most accomplished central bankers in US history, low interest rates during his term have been blamed for fueling the housing bubble and eventual crash that touched off the current financial crisis.