MercoPress. South Atlantic News Agency

Greenspan “mea culpa” and financial crisis before Congress

The once powerful guru of global finances admitted having committed mistakes

Former United States Federal Reserve chairman Alan Greenspan confessed on Thursday that he had made “mistakes” in championing the light-touch US financial regulatory system, which led to what he admitted had become a “once-in-a-century credit tsunami”.

Greenspan revealed he had been "shocked" by the breakdown in the US credit markets and conceded that he had been "partially" wrong to resist calls for greater regulation of some securities. Giving evidence to a House of Representatives committee, the man who was credited with overseeing an unprecedented era of low-interest rate-driven prosperity in the US accepted that he had been wrong in some of his judgments. Greenspan, who stepped down from the Fed in 2006, told the committee: "We are in the midst of a once-in-a-century credit tsunami." He added he realised his "mistake" when he found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works". Despite concerns he had in 2005 that risks were being underestimated by investors, Greenspan accepted that the crisis had "turned out to be much broader than anything I could have imagined". "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". Greenspan softened his long-standing opposition to many forms of financial market regulation, acknowledging that he was wrong in his belief that some trading instruments did not need oversight. He was repeatedly pressed over his statements during his time in office that the market could handle regulation of derivatives without government intervention. Greenspan admitted that a securitisation system that stimulated appetite for loans made to borrowers with difficult credit histories was at the heart of the breakdown of credit markets. "Without the excess demand from securitizers, sub-prime mortgage originations – undeniably the original source of crisis – would have been far smaller and defaults, accordingly, far fewer," he said. A surge in demand for US sub-prime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added. Greenspan argued that regulators could not predict the future or make perfect decisions. He said: "We cannot expect perfection in any area where forecasting is required. We have to do our best, but cannot expect infallibility or omniscience." The congressional 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 insisted, "My question is simple. Were you wrong?" "Partially ... I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works".