Greenspan said he was in a ‘state of shocked disbelief’ [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 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.”
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 themselves and blamed over-eager investors for the sub-prime housing meltdown that led to the financial crisis.”
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.
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.”
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.
Henry Waxman, the House oversight committee chairman, 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.
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.”
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.
- Racism, Obama and the Fall of the American Economy – The Law of the Jungle by Fidel Castro
- Islamic finance rides the storm – SMH – 11 Oct.08
- A Futile Bailout as Darkness Falls on America By PAUL CRAIG ROBERTS
- Why America Should Listen to Ahmadinejad By PAUL CRAIG ROBERTS
- An Islamic Perspective – Meltdown in American Markets By LIAQUAT ALI KHAN
- Divide and Conquer: The Anglo-American Imperial Project
- The End of the Anglo-American Empire?
- How Empires Fall – PAUL CRAIG ROBERTS
- A Bankrupt Superpower – The Collapse of American Power
- Why Shariah? – New York Times – 18 Mar.08
- European colonialists conspired to destroy the Khilafah state
- The West to the World: Accept Our Values or Die
- Ottoman Aid to the Irish
- Part Two: The Khilafah, Investment and the Economy
- Part one: The Fragility of the financial markets
- Clash of Civilizations? – The Mother of All Pretexts – By URI AVNERY
- Religion and Foreign Policy By CONN HALLINAN
- Alan Greenspan claims Iraq war was really for oil – Times – 16.Sep 07
- An Unsustainable System – Anti-Capitalism in Five Minutes By ROBERT JENSEN
- The Caliphate: Islam’s Challenge to Global Order? – Noman Hanif
- Is the American Empire on the Brink of Collapse? By Mark Karlin
- New Oil Law Means Victory in Iraq for Bush
- Islamic caliphate a dream, not reality-experts – Reuters – 13 Dec.06
- STRANGER THAN FICTION – An Independent Investigation of 9-11 and the War on Terrorism