At today’s Financial Crisis Inquiry Commission hearing, Brooksley Born, the former head of the Commodity Futures Trading Commission, declared Alan Greenspan’s tenure at the Federal Reserve an unmitigated failure – to his face. Greenspan accords a certain degree of respect on Capitol Hill, despite Born’s accurate take on his many failures, and so this outburst was highly unusual – and gratifying.
Born, who pushed to strictly regulate derivatives under the Clinton Administration, but lost the battle to, among other people, Alan Greenspan, told the former Federal Reserve chair that his agency “failed to prevent housing bubble, failed to prevent the predatory lending scandal, failed to prevent the activities that would bring the financial system to the verge of collapse.”
“You failed to prevent many of our banks from consolidating and growing to a size that are now too big or too interconnected to fail,” Born added. She added that Greenspan’s views on deregulation, which he took as an article of faith, contributed to the Federal Reserve’s failure in delivering on its mandate.
Looking as angry as he could at his advanced age, Greenspan replied, “The flaw in the system I acknowledged was an ability to fully understand the state of potential risks that were fully untested… That means we were under-capitalizing the banking system for 40 or 50 years.”
He then pivoted to a defense of his work, using an innocent bystander argument. “I don’t have the discretion to use my own ideology to affect my judgments on what Congress did. If somebody asked my view on a particular subject, I would give it to them. But I ran my office as required by law… I fundamenally disagree with your perspective.”
This is frankly ridiculous. Alan Greenspan was known during his days at the Fed as “The Oracle.” Every word of his moved the markets and moved politicians. His viewpoints absolutely contributed to the deregulation of the financial sector. He also had lots of broad discretion while at the Fed to deal with the housing bubble. Instead he hyped it.
If anyone was watching this but me and the WSJ, they would have seen a cornered rat. Born nailed Greenspan – although, given the relative lack of interest in the FCIC, the benefit to that will be merely psychic in nature.
UPDATE: As an example of Greenspan’s fury on being challenged, he apparently just caused the lights to go out in the FCIC hearing room.
UPDATE II: In an earlier passage, Greenspan actually said “My experience has been, in the business I was in, I was right 70 percent of the time, but I was wrong 30 percent of the time. And there are an awful lot of mistakes in 21 years.” 30%!
UPDATE III: More from the BBC. Greenspan deflected blame on low interest rates for the housing bubble by saying that securitizing sub-prime mortgages was the culprit. Guess what, the Fed could have done something about that!