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Greenspan admits 'flaw' in ideology
Former US Federal Reserve chief says world faces "once-in-a-century credit tsunami".
Last Modified: 26 Oct 2008 20:08

Greenspan said he was in a 'state of shocked disbelief' over the crisis [AFP]

Alan Greenspan, the former US Federal Reserve chairman, has publicly admitted that the US free-market ideology that he and others have championed for decades is flawed.

Greenspan, who headed the US central bank for more than 18 years, said on Thursday that he had "found a flaw ... in the model that I perceived is the critical functioning structure that defines how the world works".

The admission is one of the most significant comments made by a key architect of the world financial system that is now in chaos amid the global economic crisis.

His comments came as he gave evidence to the US House committee on oversight and government, which is seeking to discover if regulatory failings had contributed to the turmoil.

Henry Waxman, the committee chairman, asked Greenspan: "You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crises. You were advised to do so by many others and now the whole economy is paying its price.

"Do you feel that your ideology pushed you to make decisions that you wish you had not made?"

Greenspan replied: "Yes I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact."

'Grilled'

Al Jazeera's John Terrett, reporting from New York, said: "Greenspan used to be treated like a returning victorious general every time he went to Capitol Hill.

"During his 20 years as head of the US central bank, the Federal Reserve, Americans never felt better off.
 
"Today, it wasn't quite like that. It was a very different Alan Greenspan who was dragged back to Capitol Hill and grilled ... in came hostile questions about unfettered lending and lack of oversight.
 
"Gone was the usual deference for the man considered chief architect of America's 80s and 90s boom years.
 
Greenspan said he was shocked at the banks' inability to self-regulate and blamed over-eager investors for the sub-prime housing meltdown that led to the financial crisis, our correspondent said.

Greenspan's critics had accused him of leaving interest rates too low in the early part of the decade, spurring an unsustainable housing boom which went largely unregulated.

'Credit tsunami'

Admitting to the "flaw" in his free-market ideology, he said: "That is precisely the reason I was shocked, because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."

IN DEPTH

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Q&A: The US financial meltdown

Reacting to the financial crisis

Wall Street gripped by uncertainty

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

He said that the current global financial crisis was a "once-in-a-century credit tsunami" which will have a severe effect on the US economy and drive unemployment higher.

He admitted he had also been "partially" wrong in opposing the regulation of derivatives in recent years.

He was joined by John Snow, the former treasury secretary, and Christopher Cox, the securities and exchange commission (SEC) chairman.

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.

Many mistakes

Waxman, a Democrat, said: "The list of mistakes is long and the cost to taxpayers is staggering.

"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."

Bailout 'adequate'

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

When home prices finally stabilise, 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 was correct in moving forward aggressively with efforts to support the financial sector.

He called the $700bn rescue package passed by the US congress on October 10 "adequate to serve the need" and said that its effect was already being felt in the markets.

Source:
Al Jazeera and agencies
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Feedback Number of comments : 28
 
JW
United States
23/10/2008
Greenspan wakes up
Now you tell us?! Rambling and incoherent "testimony" before congress, coupled with inattention and a desire to serve the political elite are the hallmarks of Greenspan's "ideology." I'll bet his investments and personal finances are doing just fine.

Lisa
United States
24/10/2008
Greenspan head is flawed, not the system. It was predictable that crisis would come: government lazy people did nothing to regulate, 100% finance, no money down, Stated Income Stated Assets loan program- banks did not require any documents. All above factors contributed to the buble in real estate and downfall. Case is simple and predictable, but Grennspan's brain is stupid. Take man and government to preason, they have to be punish for not doing their jobs. Let some banks go bankrupt.

Patrick
United States
24/10/2008
The end must be near...
Greenspan is out of his mind. He is mistaking government intervention for free markets. The US DOES NOT HAVE FREE MARKETS! The credit crisis is the result of the Federal Reserve's inflationary monetary policy, NOT the market. It's far too easy to blame capitalism, rather than do any critical thinking about what allowed - and even encouraged - banks to give risky loans. The answer is the Federal Reserve, just like in the Great Depression and the '70s.

Vera Gottlieb
Germany
24/10/2008
It is high time to retire this senile fool.

Nana
United States
26/10/2008
Greenspan- idiot of the century
Greenspan is the biggest idiot who did not perform his job. It was simple and predictable that Real Estate and banks will crash because of: 1.100%- financing 2. Stated Income, Stated Assets- No documents were required by banks to get loan to purchase Real Estate. This is very simple - people should document income and put downpayment. Greenspan should go to prison and pay for damages. Banker-USA

Jamil
Singapore
26/10/2008
How about dead sentence for filthy garbage
So he made mistake and he is sorry. How patetic? Who is going to compensate those who lost. American Dream. Just a bunch of rubbish. As others have said American Dream: t only happens when you dream.

Heimdall
United States
27/10/2008
Greenspan admits flaw in ideology
Greenspan was very naive in believing that unregulated capitalism would not be devoured by its own greed... And now, the US taxpayer, and the world, will bear the consequences of Mr. Greenspan's naivete.

Anita Cuillerier
Canada
28/10/2008
Flaw in ideology, flaw in remedy
Good day, The way I see it, the taxpayers will give billions of their money to the banks in order for the banks to lend the taxpayer back that cash, with interest. And perhaps the taxpayer will get his money back, perhaps not, but certainly not with interest. Something is wrong with that picture.

Johnson
Canada
23/10/2008
Joke Time
Look at the picture. The people in the front row are all laughing. Maybe Greenspan is laughing too.

Wayne Lewis
Canada
24/10/2008
Greenspan
If one looks at the [picture] audience for this article it clearly shows everyone with a smile on their face. Wouldn't you think that the greatest economic meltdown in 80 years would promote a more somber reaction? Nope, the cat ate the mouse and the poor, once again, are going to have to pay the price for unregulated greed.

alan hayes
Australia
24/10/2008
Greenspan admits flaw in ideology
Greenspan and his mates must be pompous gits. It's simple! Don't produce anything, spend more than you make through actual production, and you will go broke.

Joe B
Afghanistan
24/10/2008
Greenspan admits flaw in ideology
Speaking in laconic riddles doesn't equate to speaking the truth. Alan Greenspan is arrogant and conceited twit who refuses any attempt at insight into his culpability for this tragedy. He would do the world a favor to shut up. He has done irreparable harm, and that is his legacy - the failed policy of pompous failure!

Mr Poor
Canada
24/10/2008
Greenspan admits flaw in ideology
How about all those who profited from the system , knowing full well that it could not sustain its-self, give back all but $1Mil to the system to help bail it out. All you rich toffs in favor say I! ....... what no-one up for it ...... what a surprise.

Dave Kidd
Australia
24/10/2008
Greenspan grilled: should we weep?
So poor Alan Greenspan has been grilled. Should we feel sorry for him, or demand that the fortune that he and those who appointed him were paid out of the public purse whilst he was making his mistakes should now be confiscated to help fund the recovery?

Hussam Beg
United Arab Emirates
24/10/2008
Federal Reserve
Contrary to the unquestioned belief that Federal Reserve is Govt. owned, it is a dangerous fact that it is actually a private institution. Greenspan knows what he is doing and by admitting that there was a so-called "flaw", he has deliberately allowed a stain on his dignity and intellect, which is nothing compared to what he will announce in the coming days. Wait and watch what unfolds next.

T.Foster
Great Britain (UK)
25/10/2008
Grynspan
So now the man who was almost the God of economics has been shown to have feet of clay.But,of this I am certain,he has not suffered in the debacle,his lifestyle will not be affected neither will his ridiculous pension be reduced. It seesm that we are in the hnads of people who understand only one thing.What is good for my personal finances must be good for the world.Why do most religions condemn betting gambling when this,the very worst form,is never assailed?

Ryan
United States
25/10/2008
Free Market
Because men like Greenspan who have spent their lives protecting and enforcing principles of free market economics are the only reason that technology like the personal computer has been put at your finger tips Mr. Foster. We should all think twice before we toss out the system that has allowed us all unprecedented access to other cultures and the ideas and products they have to offer. To assert that Laissez faire economics is "the worst form of gambling" is absurd.

Jack1059
Canada
26/10/2008
Greenspan
After years of pushing a model that most environmentalists sais was flawed, the chickens have come home to roost. That said, I give it to Alan Greenspan to admit before pretty much the world that yes, it is flawed. Now we can fix it and hopefully never do this again.

j
United States
26/10/2008
credit crisis
have we forgotten the responsibilty of the individuals who agreed to these loans who should be held accountable for their decisions. the consumer is as much to blame as the banks who provided these loans with no proof of income and verification of ability of the consumer to make their payments. shame on the home buyer for not having enough common sense to realize that they could not afford their purchase. a 5 yr arm means adjustable rate mortgage.....how hard is that to decifer????

Gary
United States
26/10/2008
Greenspan actually said it was a flawed economic model, not a flawed ideology
I'm disturbed by the spin put on the reporting of Greenspan's admission. I heard his comments. Greenspen said he found a flaw in his economic model, not a flaw in an ideology. The Democrat who asked Greenspan a question used the term ideology. Why did Aljazeera feel a need to put a different spin on Greenspan's actual comment?

Mat
Japan
27/10/2008
Greenspan et al.
The FRB's economic model(s) (i.e. Greenspan now Bernanke because they are essentially at the controls) forms an essential part of America's (capitalist) ideology. They go hand in hand. Besides, NO ideology - capitalism, socialism, communism etc. is perfect - they are ALL flawed. It may not be flawed for people like Greenspan himself who surely like to line their own pockets but when it does more harm than good to a large chunk of the population, then time for change......

jay
Canada
27/10/2008
Al re: Gary: Jazeera uses US free-market ideology rather than model
Why does it matter whether it is a model or an ideology? It could well be a simple oversight, but say it is not: Do you take issue with the negative connotation, or with the literal mistake (i.e., they are not synonyms because one is the product of the other)?

billthelifer
United States
27/10/2008
so-called free-market
What a number of people in this country (read some of your feedback, e.g, Ryan's) haven't figured out is that a totally unregulated market is NOT a "free market" any more than a society with no rules and no government and no social contract (read: anarchy) is a "free" society. In the jungle, you have no freedom if you're the meal.

LP
United States
28/10/2008
If we weren't drowning in this sea of idiots, America would have a lot more money. It has nothing to do with "flawed" ideology, and everything to do with stupid people taking loans out on houses they can not afford. It's that simple, if you can't afford it don't buy it.

Raul Alvaro Fraser
Spain
28/10/2008
Greenspan found a Flaw in his ideology
Great photo for the article. Look at them laughing behind Greenspan. Well, at least it sounds like an honest answer. He comitted a mistake, but unlike us, he got paid for it, and pretty well for sure. My answer would be simpler: isn´t this the first thing you learn in economics? that is is an uncertain science? (here in Spain people were borrowing up to 120%: the cash for the mortgaged house, plus a car). LP, idiots like us can´t be blamed for the lot. Banks must be held accountable.

Drifting Cloud
Norway
28/10/2008
By 1987 we could have dealt with underlying economic problems by adopting a proposal for bankruptcy reorganization of the entire economic system. Instead, Alan Greenspan was brought in who said, "Hold on, nobody`s gonna go bankrupt, I have a new idea of how we can paper this thing over". Now, this idea wasn`t new, this is what Milken was sent to jail for: the 1980s "coke head economics" which used to be considered criminal activity, became standard operating procedure under the crook Greenspan.

Jew lover
United States
29/10/2008
LP, your blockheaded comment on America having a lot more money proves your ignorance of economics, and hopefully should have kept you from saying anything at all. Having more money is not good for the economy, as Greenspan and any first year Eonomics student would tell you. that's what's called inflation

Renak
India
29/10/2008
Credit Crisis
This is what happens when any one stretches themselves beyond the limits, so why the blame games? Hope they will learn from this experience. Plastic cards are always smooth & light on the pocket!! Americans are very gullible. Also their over confidence in their government, ostrich behavior to the world around them & fear of the unknown has brought this misery to their door step. For a better future, should concentrate more on children’s education & family life, than mimicking the celebrities too