Oops!

Oracle of Wall St has an epiphany

24-Oct-08. So there was Alan Greenspan sitting at the witness table before the House Committee on Oversight and Government Reform:

I made a mistake in presuming that the self interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders and the equity in the firms.... The problem here is that something that looked to be a very solid edifice and indeed a critical pillar to market competition and free markets did break down. And that, as I said, shocked me and I don't fully understand why it happened.

Greenspan, former head of the Federal Reserve, along with former Treasury Secretary John Snow and current SEC Chairman Christopher Cox dined on supersized helpings of crow during their testimony, served up by Rep Henry Waxman (D-CA), chairman of the committee. The three professed to be mystified by the collapse of the financial system.

Who could have known?

Greenspan was once held in such high esteem that he served under four presidents — Reagan, Bush (41), Clinton, and Bush (43) — and the world hung on every delphic word every time he spoke. But he has a lot to answer for, now that the house of cards he helped build has come crashing down.

• He extolled the virtues of sub-prime loans: "As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means...."
• He fiercely opposed any regulation of derivatives: "What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so"
• Throughout his tenure at the Fed, he insisted that markets would always be right and would self-regulate: "Risks in financial markets, including derivatives markets, are being regulated by private parties.... There is nothing involved in federal regulation per se which makes it superior to market regulation.

Two huge bubbles have burst in the last decade, technology and housing, both fueled by easy money and cavalier disregard for risk.

The United States has long promoted a laissez-faire version of capitalism to the world, and now the economies around the world lie in shambles.

Oh, yes, Mr Greenspan has a lot to answer for.

I'm not saying that he is completely to blame. But he is an ideologue who held staunchly to his theories, and his reputation largely shielded him from challenge. I mean, greed is powerful, and while markets were soaring hardly anybody questioned Greenspan's policies. Now we're paying the price.