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Greenspan defends role in recession
Former US Federal Reserve chief denies that his policies encouraged risky lending.
Last Modified: 07 Apr 2010 17:09 GMT
Greenspan has denied that policies of low interest rates encouraged greater risks [Reuters]

The former head of the US Federal Reserve has defended his role in the lead-up to the global financial crisis, blaming a global appetite for high-risk subprime mortgages for contributing to the meltdown.

Alan Greenspan appeared before a congressional hearing in Washington DC on Wednesday to testify on the causes of the collapse of major financial institutions that helped fuel the global recession.

Greenspan admitted making mistakes in the lead-up to the recession, but he argued that regulators could not be fully expected to predict and prevent crises.

"Did we make mistakes? Of course we made mistakes," he said.

"Managers of financial institutions, along with regulators, including but not limited to the Federal Reserve, failed to comprehend the underlying size, length and potential impact" of market risks that contributed to the crisis.

Greenspan said the crisis reinforced important messages about what "supervision and examination" can and cannot do.

"History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be," he said.

'Abusive' subprime loans

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.

He again faced heated exchanges during Wednesday's hearing, as Phil Angelides, the commission chair, accused him of failing to prevent "abusive and  deceptive" subprime home loans from causing the collapse of the housing market.

"You could've, you should've, and you didn't," Angelides said.

In depth

The best of Al Jazeera's reports on the recession

Al Jazeera's Rosiland Jordan, reporting from Washington, said the congressional commission is investigating whether Greenspan used his ability to issue regulations to try to clamp down on the issuance of subprime mortages.

"Basically, giving mortgages to people who didn't earn enough money to pay the mortgages back," she said.

"There's a lot of back and forth going on right now about whether or not Greenspan saw the problem, did enough to regulate the problem, or at least write the rules so other federal agencies could clamp down on the banks who were making billions of bad loans."

But Greenspan denied in his testimony on Wednesday that the policies of low interest rates and loose regulation encouraged lenders and borrowers to take greater risks.

"The house price bubble, the most prominent global bubble in generations, was engendered by lower interest rates, but... it was long-term mortgage rates that galvanised prices, not the overnight rates of central banks," he said.

Source:
Al Jazeera and agencies
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