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Paul Kiesel
Paul Kiesel
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Greenspan on the Financial Crisis: "I Made a Mistake…"

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The former Federal Reserve chairman Alan Greenspan, who was once considered by many economists and government officials to be an "infallible maestro" of the financial system, was hammered yesterday on the multifarious problems the country faces due to the financial crisis.

Greenspan has been a long supporter of deregulation and brought that ideology to the Fed for 18 years, but is now admitting that he was "partially" wrong in not having tried to regulate the market for credit-default swaps. In a tense exchange with Representative Henry Waxman (D-CA), who is the chairman of the House Committee and of Government Oversight and Reform, Greenspan admitted that, "I made a mistake presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," (New York Times, 10/24/08).

Greenspan’s new, evolved view on free-market ideology (hindsight being 20/20 of course): "I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by the fact." So he’s found a flaw, but he doesn’t know its significance (what it really looks like or where it lies in the financial infrastructure) or how long it’s going to trouble the U.S. economy. That’s like saying I’m aware that treasure is buried under a vast stretch of beach, but I have no map and really don’t know the amount of treasure that’s buried.

Rep. Waxman, none too pleased with Greenspan’s assessment of his failed ideology, responded by saying, "In other words, you found that your view of the world, your ideology, was not right, it was not working."

"Absolutely, precisely [. . .] You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well."

By "exceptionally well," Greenspan must have meant this: "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out [. . .] There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don’t know, but I think the worst of this may well be over," (MSNBC.com, 10/9/06).

Or maybe he’s so shocked because: "What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so," Mr. Greenspan told the Senate Banking Committee in 2003. "We think it would be a mistake" to more deeply regulate the contracts, he added. (New York Times, 10/8/08)

One of the most influential figures in American economics, for almost the past two decades (since Regan was president), doesn’t know how this started? It’s too complicated for him? If this is really true, that a man like Alan Greenspan who was revered by four White House administrations doesn’t know how we got into this financial mess (granted, it’s all very convoluted, but the financial crisis does have a variety of stark originating points: i.e. Gramm-Leach-Bliley Act of 1999, Commodity Futures Modernization Act of 2000, etc.), then this situation has the potential of getting much worse than analysts have been anticipating over the last few months (some predict we should be making our way out of this downturn by 2010), prompting massive layoffs and rising unemployment numbers, all because one of the men involved with dictating our financial system doesn’t even know where his own mistake started.