Greenspan vs. Greenspan: Don't Know Much About History

In 2001, Alan Greenspan warned against policies he said would slow U.S. economic growth and destroy the vast budget surplus the nation enjoyed at the time. "With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating," the then Federal Reserve Chairman told lawmakers. "We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake."

Today, Greenspan is presenting a paper at Washington's Brookings Institution in which he tries to shed any responsibility for that era's signature state of euphoria and to deflect blame for the massive deficits of the present. It's a comically revisionist redrafting of history -- and accountability. It's like Bernie Madoff suddenly recanting his crimes and chalking them up to his irrationally exuberant investors.

The policies Greenspan was advising against eight years ago were things like raising taxes and tightening government regulation. He said not a word about the lethal cocktail of subprime lending and low interest rates, among other causes of the current morass. And why would he have? Greenspan famously denied the existence of a housing bubble.

Greenspan now points to the securitization of subprime loans, an influx of foreign capital and faulty federal supervision as the main catalysts for the financial crisis. There's a few things wrong with that narrative.

First, banks had been slicing up loans and selling them off for decades, largely without incident, before the subprime market caught fire. What's more, as Yale University finance prof Gary Gorton pointed out in a recent paper, not enough subprime loans were securitized to have caused losses on the scale that we've subsequently witnessed.

Second, under Greenspan's gonzo monetary policy, the Fed for deliberately fed the housing bubble for years by suppressing interest rates. It also trumpeted the merits of subprime lending, going so far as to support the use of now notorious adjustable-rate mortgages.

Third, Greenspan openly fetishized the free market and did everything in his power to gut financial regulation. Among his exploits was to snuff out efforts by other financial watchdogs to clamp down on derivatives, which would later swamp AIG and plague corporate balance sheets across the land.

Certainly, securitization, along with weak lending standards and a tide of yuan and yen, undeniably fueled the bubble. But for Greenspan to diminish his role in the orgy of predatory lending and deregulation that triggered the crash is to reshuffle the facts, like a shell-game hustler hiding the Black Queen.

Greenspan isn't merely content to dodge culpability for the financial crisis -- he casts himself as an innocent bystander struck down by forces beyond his control. He writes, "In short, geopolitical events ultimately led to a fall in long-term mortgage interest rates that in turn led, with a lag, to the unsustainable boom in house prices globally."

Note the passive construction -- "led to a fall" -- that conveniently edits him and the Fed out of the picture. As they say in Washington, mistakes were made.

Greenspan also insists that he sounded the alarm, just as he had in 1996 before the dot-com crisis. "Similarly in 2002, I expressed my concerns before the Federal Open Market Committee that '... our extraordinary housing boom... financed by very large increases in mortgage debt, cannot continue indefinitely.' "

If only he'd done something about it.