WASHINGTON (AP) — Badgered by lawmakers, former Federal Reserve Chairman Alan Greenspan denied the nation’s economic crisis was his fault but conceded on Thursday that the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a “state of shocked disbelief.”
Greenspan, who stepped down as the US central bank head in 2006, called the banking and housing chaos a “once-in-a-century credit tsunami” that led to a breakdown in how the free market system functions. He warned that things would get worse before they get better, with rising unemployment and no stabilization in housing prices for “many months.”
Gloomy economic reports backed him up. New jobless claims soared to just under 500,000 for last week, and Goldman Sachs, Chrysler and Xerox all said they were cutting thousands more workers. On Wall Street, the Dow Jones industrials bounced erratically all day before finishing up 172 points after a two-day drop of nearly 750.
The financial crisis even prompted the Republican Greenspan, a staunch believer in free markets, to propose that government consider tougher regulations to prevent a recurrence of the problems, including requiring financial firms that package mortgages into securities to retain a portion of the securities they sell as a check on their credit quality.
“As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,” Greenspan said in testimomy before the Government Oversight Committee in the House of Representatives. He said other regulatory changes should also be considered in such areas as fraud.
Looking for solutions, another banking regulator told Congress the government was working on a loan-guarantee plan that could help many homeowners escape foreclosure as part of the $700- billion bailout legislation. That plan is being discussed by the Treasury Department and the Federal Deposit Insurance Corp., said FDIC Chairman Sheila Bair, who is pushing the idea.
Greenspan’s interrogation was very different from congressional appearances during his 18 years as Fed chairman, when he presided over the longest economic boom in the country’s history. He was viewed as a free-market icon on Wall Street and held in respect bordering awe by most members of Congress.
Not now. At an often contentious four-hour hearing, Greenspan, former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox were accused repeatedly by committee Democrats of pursing an anti-regulation agenda that set the stage for the biggest financial crisis in 70 years.