Thursday, April 08, 2010

'Maestro' Greenspan out to protect his legacy

Business Times - 09 Apr 2010


'Maestro' Greenspan out to protect his legacy

By LEON HADAR
WASHINGTON CORRESPONDENT

THEY were hoping that the 'maestro' would provide some light about how the policies of the US central bank may have helped create the conditions for the devastating financial crisis that almost brought down the entire American economy. But then, in an emblematic moment, Alan Greenspan ended up leaving them literally in the dark.

It is the Broadway producer's worst nightmare: The power goes off on the stage and interrupts the leading actor in the middle of his performance. Indeed, the Capitol Hill hearing room went dark at 11.44am on Wednesday during the most dramatic show of this political season in Washington, DC.

The former Federal Reserve chairman was beginning to respond to a question from panel chairman Phil Angelides during the Congressional hearing by the Financial Crisis Inquiry Commission (FCIC) and . . . oops . . . power was off for 23 minutes, interrupting Mr Greenspan's testimony before the 10-member group that was investigating the causes of the financial crisis.

Not to worry. Mr Greenspan recovered very quickly and continued with his testimony in the dark as he tried to convince the members of the FCIC and those who were watching the hearing being broadcast live on television that he was not responsible for the financial mess which was 'most severe in history', as he put it.

'I just want to say, Mr Greenspan, you gave a lights-out performance,' Mr Angelides said after Mr Greenspan completed his answer and as someone was starting to pull back the drapes and allow the sunlight into the hearing room.

Mr Greenspan did admit that mistakes were probably made during his long tenure as the head of the US central bank - from 1987 to 2006. But he insisted that contrary to the conventional wisdom promoted by many mainstream economists, the low interest rate policy embraced during his tenure in the Fed didn't cause the housing bubble and the ensuing financial meltdown. Moreover, Mr Greenspan apparently was right; well, most of the time . . .

'When you've been in government for 21 years, as I have been, the issue of retrospect and what you should have done is a really futile activity,' Mr Greenspan said. 'I was right 70 per cent of the time. But I was wrong 30 per cent of the time, and there were an awful lot of mistakes in 21 years,' he said.

In addition to being criticised for holding the central bank's interest rates too low, Mr Greenspan was also slammed for failing to use the Fed's authority to supervise and enforce in order to protect consumers from sub-prime mortgages and other suspected financial products.

'Why in the face of all (the sub-prime lending) did you not move to contain abusive sub-prime lending?' Mr Angelides asked. Mr Greenspan responded that the sub-prime mortgage market was not subject to the authority of the Fed.

'The data show that, in 2004 and 2005, more than half of sub-prime loans were originated by independent mortgage companies subject to consumer-protection enforcement by the Federal Trade Commission and various state agencies,' Mr Greenspan explained.

In fact, Mr Greenspan seemed to blame everyone and anyone but the Fed for the ballooning sub-prime mortgage market, demonstrating that he was the ultimate CYB (covering your behind) Maestro.

In particular, he blamed the giant mortgage lenders Fannie Mae and Freddie Mac for aggressively promoting home ownership while overlooking the rising problems in the sub-prime mortgage market. Credit-rating agencies failed to warn of questionable financial products, banks did not keep enough cash, and it was Congress that put pressure on the Fed to keep down interest rates.

The sub-prime mortgage crisis was the result of the securitisation of risky home loans into assets that were divided and sold around worldwide, a market that ballooned to more than US$900 billion by 2007. The culprit: strong demand from foreign investors.

And what about the failure of the Fed to move faster to contain the spread of sub-prime lending, Mr Angelides asked. The US central bank had limited power to enforce regulations, Mr Greenspan responded, stressing that he did take steps to protect consumers from predatory lending. 'We did do almost all of the things that you are raising,' he said.

His fallback position? Imagine how bad things could have been if Mr Greenspan's Fed were not around!


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