Greenspan: My Faith In Banks A "Mistake"

Former Federal Reserve Chairman Tells House He Sees Flaw In The Free Market Model

(CBS/ AP)  Former Federal Reserve Chairman Alan Greenspan says the current financial crisis has uncovered a flaw in how the free market system works and that has shocked him.

Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proven to be wrong in the latest crisis.

Greenspan said he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

He bluntly called the current financial crisis is a "once-in-a-century credit tsunami" which will have a severe impact on the U.S. economy, driving unemployment higher.

Asked if the White House agreed with Greenspan, Press Secretary Dana Perino said, "I think that is right." Perino added more grim assessments, saying, "we’re in for a rocky road on the employment front and we expect our GDP number next week not to be a good one. And the next quarter could probably be tough as well.

Greenspan, who headed the U.S. central bank for 18½ years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief."

He said that the current crisis had "turned out to be much broader than anything that I could have imagined.

The committee called Greenspan to testify along with former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox as lawmakers sought to discover if regulatory failings had contributed to the crisis.

House Oversight Committee Chairman Henry Waxman said that he believed that the Federal Reserve, which regulates banks, the SEC and the Treasury had all played a role in contributing to the mistakes.

"The list of mistakes is long and the cost to taxpayers is staggering," Waxman, a Democrat, told the three men. "Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible."

In his testimony, Greenspan blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

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Read CBS poll on Americans' concerns about job security

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Also Thursday in a separate hearing, the head of the government's $700 billion financial rescue program told Congress the Bush administration has made "tremendous progress" in pushing to get it implemented.

Neel Kashkari, a Treasury Department official who is interim head of the program, told the Senate Banking Committee in prepared testimony that since last week's announcement that the government would spend $250 billion to buy bank stocks to bolster capital reserves, there has been "numerous signs of improvement in our markets and in the confidence in our financial institutions."

Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the same Senate panel that the government needs to do more to help tens of thousands of home borrowers avert foreclosure, including setting standards for modifying mortgages into more affordable loans and providing loan guarantees to banks and other mortgage services that meet them.

"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

The FDIC is working "closely and creatively" with the Treasury Department on such a plan, she said.

A report showed the number of homeowners ensnared in the foreclosure crisis grew by more than 70 percent in the third quarter of this year compared with the same period in 2007, according to data released Thursday. Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier.

Meanwhile there was more distressing news for the economy as layoffs continue to mount. Chrysler announced another 1,800 job cuts, reports CBS News business correspondent Anthony Mason.

"The economy's so bad that nobody's buying cars," Kevin McWilliams told CBS News. "So it makes it hard on everybody."

Both hearings were expected to be contentious as lawmakers, already upset about having to vote for the biggest bailout in U.S. history, sought answers to what went wrong and try to determine why the government's rescue effort, which just cleared Congress on Oct. 3, already has undergone a radical overhaul.

As both men spoke, Wall Street spent another session buffeted by volatility. Investors wrestled with their fears about the economy but also looked for bargains after two days of selling. While the Dow Jones industrials and Standard & Poor's 500 index rose sharply, a downdraft in tech stocks left the Nasdaq composite index with a loss.

Greenspan said that a necessary condition for the crisis to end will be a stabilization in home prices but he said that was not likely to occur for "many months in the future."

When home prices finally stabilize, Greenspan said, then "the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk."

Greenspan said until that occurs, the government is correct to move forward aggressively with efforts to support the financial sector. He called the $700 billion rescue package passed by Congress on Oct. 10 "adequate to serve the need" and said that its impact was already being felt in markets.

Greenspan did not specifically address the criticism he is receiving now as being partly to blame for the current crisis.

Greenspan's critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.

In his testimony, Greenspan put the blame for the subprime collapse on over-eager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.

"It was the failure to properly price such risky assets that precipitated the crisis," Greenspan said.

[runningralph]

Flajoe1,
Also, Alan Greenspan was chairman of the Federal Reserve all through the Clinton administration and did a great job of keeping inflation in check and interest rates low. Ideal conditions for growing an economy. Greenspan has been out of that position for a couple of years. He warned against unreasonable exuberance in the markets. But that''s all he can do is warn. If people refuse to listen and go hogwild he can just look on in dismay.

[runningralph]

Flajoe1,
Yes I would call George Bush a liberal. He''s not a bad guy, but the last conservative President was Eisenhower in my opinion. Before that Teddy Roosevelt.

[palin08o8]

You know what I changed my mind about Obama! I think he will be better for national security and the economy!

Plus sarah palin $150,000.00 on clothes, most Americans could have bought a home for that amount!

Besides I think Sarah Palin is really a Terrorist

Breaking News: The Terrorist Group AKA Alaska Independent party Calling on Russia to help secede from the Union
www.chilitoz.com
Extremists Mark Chryson and Steve Stoll former leaders of the Alaska Terrorist group AKA Independence Party and friends of Sarah Palin are calling on Russia to help them gain independence from the United States.

Watch video of Sarah palin addressing The Alaska Terrorist Group also known as The Independence party. They are calling for a civil war against the mainland.
www.chilitoz.com

[flajoe1]

The reason they deserted conservative loan policies was because of pressure from liberal politicians. A chain is only as strong as it''''s weakest link. The weak link is in Congress.

Posted by runningralph at 09:00 AM : Oct 24, 2008

Would you call George Bush a liberal? Go to You Tube and look up "Bush ownership society" and watch his 2002 speech about what he''s going to have Freddie and Fannie do to help low income people get mortgage loans. The pressure came for all sides and the mortgage brokers, banks and investment co. could not pass up the money to be made off these types of loans.

[grumpas]

The reason they deserted conservative loan policies was because of pressure from liberal politicians. A chain is only as strong as it''''s weakest link. The weak link is in Congress.

Posted by runningralph

You people are unbelievable!!! Are you for real or are you just that stupid????? The conservatives never have been fiscally responsible. I don''t know what made Greenspan think they would be? They always ''borrow and spend'' us into oblivion. It happened with Reagan, while he ran the deficit into the stratosphere. They always deregulate and let the fox guard the hen house. Then wonder why things wind up a mess. They have literally no common sense on how to run a country. A lot of us former Republican''s quit voting for them in the 80''s when we discovered they weren''t conservatives.

[runningralph]

whatithink10,
You certainly have a better explanation of the banking industries plight than I do. I tend to stick to basics. What you describe is a bubble inflated by hype and liberal policies. It only takes a small point to pop a large bubble. Developers and real estate agents blew up the bubble, and high fuel prices caused the pop. Bankers were in the middle and could have provided the brake on the bubble had they practiced conservative loan policies. The reason they deserted conservative loan policies was because of pressure from liberal politicians. A chain is only as strong as it''s weakest link. The weak link is in Congress.

If it is true that the banks have proven to be unfaithful stewards, why has my government given them $700 billion to use as they see fit, without supervision and without controls on the spending?

If it is true that the banks have not operated in the best interests of their depositors, why has my government given them $700 billion to use as they see fit, without supervision and without controls on the spending?

Is my government stupid?

[sayso2]

It''s mindboggling how folks like Greenspan who have wielded so much power with their decision making authority and were entrusted to protect the economy can use phrases like: "I didn''t know," or "I didn''t think," or "I couldn''t imagine." If I professed that degree of ignorance in my jobm I would be shown the door very quickly. No one in this entire country wants to take any responsibility for the economic mess we''re in. Perhaps the conservatives are right to believe that there should not be a general redisrtibution of wealth between social classes. However, the crooks and thieves who brought the economy to its knees should forfeit their wealth to help those who have suffered as a result of their greed and dishonesty.

[flajoe1]

Hey Greenspan you D-bag

How about a $100K "bail out" for my 401-K

[midvale3]

Unbelievable, he''s "shocked" that the greedy bastaards abused the system. When will the "upper crust" realize they are no better than the drug dealer on the street. Both are greedy and don''t give a dammn who they hurt to get their profit.

[spiritwalk]

"Time for the rich and elitest cultures of this country to see GOD face to face and explain their lack of humanity."
Posted by tbuckl9501
.................
Isnt it strange how all the "God fearing", bible believing", "10 Commandments posting" people seem to act like they don''t believe they will ever have to do that?
I am not a believer in those things, but one thing I do believe is that I am not going to be able to BS God. So maybe that explains it. They think God is all-knowing and all-powerful, but they think they can come up with a good BS story that God will fall for.

[tbuckl]

Greenspan thought that Corp. American CEOs were going to protect their shareholders, WHAT A JOKE! They only care about their money and the master they serve. What gets me is that these CEOs want everyone to believe they had no hand in this, that the housing market caused this situation we are now in, Governmental Bullsh..t! It was the greed of these CEOs and their golden retirement plans, vacations, million dollar boats, planes, and cars and their throw-away attitude. It those CEOs with their 7 homes and hired help from Mexico. I suggest we bring these CEOs to the town square and have them quartered. Those with the gold blame those who have none, same old story, same old blame, same preverts running the country and telling us what morals we must have while having none themselves. Time for history to repeat itself as it did in the American & French Revolutions. Time for the rich and elitest cultures of this country to see GOD face to face and explain their lack of humanity.

[spiritwalk]

Greenspan is either naive for someone reputed to be so smart, or a serious gangster.
Posted by brianbwb
....................................
Greenspan was allowed the same kind of power at the Fed that Hoover was allowed at the FBI and he played the Fed to his own advantage. Now he is playing the congress with the "Oh shucks! It''s not my fault. (that''s my story and I am sticking to it.)" defense.
He will get away with it to, since his wife is a big wheel at NBC News and has the power to keep the news stories off him.
So, when you hear Andrea Mitchell telling you the "truth" about the news just look at the picture of Greenspan and imagine him crawling and drooling all over her at night. Kind of makes you wonder about how much you should pay attention to what she tells you, doesn''t it?

[brianbwb-2009]

Greenspan is either naive for someone reputed to be so smart, or a serious gangster.

Did he really not understand that unregulated businesses will behave exactly the same as individual people in the absence of law enforcement?

Did he really not think hat they would form gangs, mafia, cartels, whatever you want to call them, and use the power of numbers to violate the unenforced "law"?

Al, c''mon, you must have known better than that, it makes me wonder if the "corporate Crips'' and the "corporate Bloods" got to you long ago.

[jerr11]

For this mistake which has cost many Americans dearly and even brought them to complete ruin, I suggest we bring Mr. Greenspan to the village square and have him quartered.

There''s got to be some accountability.

Easy to say "Oops" but who gets to pay for your mistake?

That goes for the Liar-in-Chief too for his numerous "mistakes," mistakes the American people are paying dearly, 4184 of them with their lives.

[palin08o8]

I am outraged!!!!!!!!!!

All that money spent on moose clothes!

$150,000.00 Could have fed thousands of families!


Just burn the moose dud smelling clothes! Charity my behind!!!!

You know what i changed my mind about Obama! I think he will be better for national security and the economy!

Besides I think Sarah Palin is really a Terrorist

Breaking News: The Terrorist Group AKA Alaska Independent party Calling on Russia to help secede from the Union
www.chilitoz.com
Extremists Mark Chryson and Steve Stoll former leaders of the Alaska Terrorist group AKA Independence Party and friends of Sarah Palin are calling on Russia to help them gain independence from the United States.

Watch video of Sarah palin addressing The Alaska Terrorist Group also known as The Independence party. They are calling for a civil war against the mainland.
www.chilitoz.com

Well Duh!

[Bernie1l]

Greenspan''s problem was not his trust in banks but his under estimate of congressional involvement. Who would have guessed Barney Frank was even capable of orchestrating such a failure. Frank still doesn''t even understand why he is the king of the collapse. Not to mention why Dodd is the queen.

[angrycorner]

I have to hand it to the man, he fessed up and called himself out on a ''misconception'' that cost a lot of borrowers and tax payers a ton of money. He in no way had to, he could have ridden out the tried and true market fluctuations argument and would the error will like everything else fall out of the memory of the majority of the people. On the other hand his argument that he never saw it coming? Not possible, with any instance you refer to in history, when the free market is afforded too much power they use it and people lose. People are greedy and corporations are greedier yet. If Greenspan never saw it coming, he probably wasn''t ever qualified to be the chairman.

TCR angrycorner.blogspot.com

[angrycorner]

I have to hand it to the man, he fessed up and called himself out on a ''misconception'' that cost a lot of borrowers and tax payers a ton of money. He in no way had to, he could have ridden out the tried and true market fluctuations argument and would the error will like everything else fall out of the memory of the majority of the people. On the other hand his argument that he never saw it coming? Not possible, with any instance you refer to in history, when the free market is afforded too much power they use it and people lose. People are greedy and corporations are greedier yet. If Greenspan never saw it coming, he probably wasn''t ever qualified to be the chairman.

TCR angrycorner.blogspot.com