Greenspan finds a flaw

Tomorrow's headlines will all look similar to what is now on the internet:

• Greenspan Concedes to `Flaw' in His Market Ideology - Bloomberg
• Greenspan Concedes Error on Regulation - New York Times
• Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers - WSJ
• Greenspan: 'Crisis Broader Than Anything I Could Have Imagined' - Wash. Post
• Greenspan Grilled on the Hill - MarketWatch

But, beyond the pathetic display of partisan wrangling, the most striking aspect of today's gathering of the House Committee on Oversight and Government Reform to discuss the role of federal regulators in the ongoing financial crisis was the tone of it all.

My how things have changed. And if you didn't know it by looking at home values, stock prices, or the quickly souring economy, you'd sure know it by how former Fed chairman Alan Greenspan was addressed by elected officials and how he responded.

Having aged noticeably in the two-and-a-half years since he retired (I guess that sort of thing happens when you're in your early eighties), the one-time "second most powerful man in the world" looked feeble and a bit unsure of himself as, time and again, he would attempt circuitous "non-answers" to direct questions only to be interrupted and pressed for a more succinct reply.

Elected officials no longer just sit and listen with mouths agape.

Like when Toto pulled back the curtain on the Wizard of Oz, all the magic is gone.

The key replies from the former Fed chairman were that he "found a flaw" in his ideology regarding how markets work, that he was "partially wrong" about derivatives, and that he “made a mistake” in trusting industries and individuals to self-regulate.

But, without a doubt, the big news was the fall from grace.

To wit, this opening exchange:

Henry Waxman: You were perhaps the leading proponent of deregulation of our financial markets, certainly you were the most influential voice for dergulation. You have been a staunch advocate for letting markets regulate themselves. Let me give you a few of your past statements:

• In 1994, you testified at a Congressional hearing on regulation of financial derivatives. You said there was nothing involved with federal regulations that make it superior to market regulations.
• In 1997, you said there was no need for government regulation of "off-exchange" transactions.
• In 2002, when the collapse of Enron led to the renewd Congressional efforts to regulate derivatives, you wrote the Senate, "We do not believe a public policy case exists to justify government intervention"
• And earlier this year, you wrote in the Financial Times, bank loan officers, in my experience, know far more about the risks and working of their counterparties than do bank regulators.

And my question for you is simple: Were you wrong?

Alan Greenspan: Partially. Let's separate these problems into their component parts. I took a very strong position on the issue of derivatives and the efficacy of what they were doing for the economy as a whole...

Waxman: So, you don't think you were wrong in not wanting to regulate derivatives?

Greenspan: Well, it depends which derivatives we're talking about. Credit default swaps have serious problems associated with them...

Waxman: Let me interrupt you because we do have a limited amount of time.
...
Waxman: Dr. Greenspan, Paul Krugman the Princeton Professor or Economics who just won a Nobel Prize wrote a column in 2006 as the subprime mortgage crisis started to emerge. He said, "If anyone is to blame for the current situation, it is Mr. Greenspan who poo-pooed warnings about an emerging bubble and did nothing to crack down on irresponsible lending".

He obviously believes that you deserve some of the blame for our current conditions. Do you have any personal responsibility for these financial crises.

Greenspan: Let me give you a little history, chairman. There's been a considerable amount of discussion about my views on the subprime market in the year 2000. And indeed, one of our most distinguished governors at the time, Governor Gramlich, who regrettably is deceased but who was unquestionably one of the best governors I've had to deal with, came to my office and said he was having difficulty with the problem of what turned out to be a fairly major problem in predatory lending...

Waxman: He urged you to move with the powers that you had as chairman of the Fed as both the Treasury Department and HUD suggested that you put in place regulations that would curb these emerging abuses in subprime lending, but you didn't listen to the Treasury Department or Mr. Gramlich.

Do you think that was a mistake on your part?

Greenspan: Well, I question the facts of that. He and I had a conversation. I said to him I have my doubts whether that would be successful. But to understand the process by which decisions are made at the Fed it's important to understand...

Waxman: Dr. Greenspan, I'm going to interrupt you. The question I have for you is... You had an ideology ... You had the authority to prevent the lending practices that led to the subprime mortgage crisis, you were advised to do so by many others, and now our whole economy is paying the price. Do you feel that your ideology pushed you to make decisions that you wished you had not made.

Greenspan: Well, remember what an ideology is. It's a conceptual framwork for the way people deal with reality. Everyone has one. To exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is that I found a flaw - I don't know how significant or permanent it is - but I've been very distressed by that fact. But if I may, can I just answer the previous question?

Waxman: You found a flaw in the reality...

Greenspan: I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.

Waxman: In other words you found that your view of the world, your ideology, was not right. It was not working.

Greenspan: That's precisely the reason I was shocked because I was going for forty years or more with very considerable evidence that it was working exceptionally well.

But, just let me finish if I may...

Waxman: Well, the problem is that time is already expired.

He then went on to explain that he believed the late Governor Gramlich was going to propose action via a subcommittee after his subprime warning and thatm since no proposals came forward, he assumed the issue had lost its importance.

There is another much more testy exchange with Dennis Kucinich at about the 1:30 mark.