“I cannot see how we can avoid a significant rise in layoffs and unemployment,” former Federal Reserve chairman Alan Greenspan told a congressional panel this morning. Greenspan was the poster boy for the boom times of the market, at least until he gave his “irrational exuberance” testimony earlier in the decade.
“What went wrong with global policies?” he asked this morning, and then answered. “Subprime mortgages served as securities became subject to explosive demand around the world.” He said as long as home prices were rising, the risk from foreclosure was “deceptively modest.”
A lot of people blame Greenspan for not speaking out about mortgage-backed securities when he had the job, although he insisted this morning, he did. “We are in the midst of a once-in-a-century credit tsunami,” he said.
Hopeless? Apparently not. Greenspan said, “this crisis will pass” and we will be stronger for it. Still, that may be cold comfort to the tens of thousands of people who Greenspan expects will lose their jobs first.
Questions and Answers
Q: (Henry Waxman) You were a leading proponent of deregulation. Were you wrong?
A: Partially. He defended “derivatives,” which he says transferred risk from those who couldn’t afford it to those who could. “I made a mistake in presuming that the self-interest of organizations — banks — was such that they were best capable of protecting their own shareholders and the equity in their firms,” he said, saying loan officers at banks knew “far more than even our best regulators.”
Q: Paul Krugman in 2006 said you shared some of the blame for the sub-prime crisis. Do you share any blame?
A: Greenspan denied that he didn’t listen to officials who alerted him to the building mortgage crisis. He blamed a subcommittee of the Fed Board would “move forward and present to the board as a whole, recommendations to be made. That didn’t happen.”
Q: Did you ideology push you to make decisions you wish you didn’t make?
A: “I found a flaw … in the model that I perceived in the critical functioning of how the world works.” (Is that’s “fed” talk for ‘yes?’).
During Greenspan’s initial testimony, the Dow jumped about 150 points.