Greenspan Discusses Credit Tsunami, Expresses Shock Over Flawed Ideology
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Former Federal Reserve Chairman Alan Greenspan testified before the House Oversight Committee today giving his view on the ongoing credit crisis. Greenspan called the current situation "a once-in-a century credit tsunami." Greenspan also admitted that his free-market ideology shunning regulation was flawed, including regulation on derivatives.
Greenspan said in 2005 he raised concerns that "the protracted period of underpricing of risk, if history was any guide, would have dire consequences," but said this crisis turned out to be much broader than anything he could have imagined. He said the current crisis has changed from a liquidity issue to one driven by fears of insolvency. He warned that a significant rise in layoffs and unemployment may be unavoidable.
Greenspan said home prices will have to stabilize before the crisis will end, which he said is "still many months in the future."
Greenspan said he and others, who have looked to the self-interest of lending institutions to protect shareholder's equity, are in a state of "shocked disbelief." He said, "Such counterparty surveillance is a central pillar of our financial markets' state of balance. If it fails, as occurred this year, market stability is undermined."
Greenspan said the breakdown of the economic policies that had worked so effectively for nearly four decades was most apparent in the securitization of home mortgages. He said these securitized products saw excess demand around the world and risk was not properly priced in part due to credit agencies giving unrealistically positive rating designations. Greenspan recommended that in the future all securitizers retain a meaningful part of the securities they issue.
Greenspan said the crisis will eventually pass, but said the financial landscape at end of the crisis will be far different.
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