WASHINGTON—Alan Greenspan defended the end of his tenure as Chairman of the Federal Reserve before the Financial Crisis Inquiry Commission Wednesday.
Greenspan has taken a lot of heat, as he oversaw the Fed while securitization and mortgage-backed securities, collateralized-debt obligations, subprime lending, and the actions of Fannie Mae and Freddie Mac, combined to burst the housing bubble.
As he attempted to explain, Greenspan said, “We couldn’t stop subprime lending because of the growth of the marketplace and the actions of Fannie Mae and Freddie Mac that we didn’t know about until 2009.” He also pointed out that, in his opinion, subprime mortgages did not play a major role in bringing about the financial crisis.
Alan Greenspan was forced to defend himself against the FCIC as they discussed what the Fed could have done to prevent the financial crisis.
However, the commission would not let him get off the hook quite so easily.
“My view is you could have [adopted more rules], you should have, and you didn’t,” said Phil Angelides, chairman of the FCIC.
In his testimony, Greenspan detailed a set of rules adopted in 2001 concerning subprime lending. Greenspan said that these rules have held up to this day. Angelides disagreed.
“At the time [the rules] were adopted, they were projected to cover 38 percent of the subprime lending market. When an evaluation was done in 2007, what in fact had happened was the rules you adopted covered just 1 percent of the market.”
Greenspan said during his career he was “right 70 percent of the time and wrong 30 percent of the time.” When Angelides asked him if the reluctance to investigate institutions such as Fannie Mae and Freddie Mac and not enacting harsher rules for subprime lending fell under the 30 percent, Greenspan replied, “I don’t know.”
One of the harshest critiques of Greenspan’s run as Fed chief centered around his keeping interest rates so low for so long. He explained his rationale to the commission.
“Monetary policy is delinked from long-term mortgage rates, but it still had an impact on short-term rates,” Greenspan said. “We needed insurance in the short-term in the market. That’s why we kept rates down.”
And Greenspan explained how political forces at the time would have prevented the Fed from raising rates anyway. “In the midst of extended home ownership where there were no problems perceived, had we said we are ‘running into a bubble,’ Congress would have said ‘You don’t have a clue what you’re talking about.’”
As the hearing was drawing to a close, the room lost power and Greenspan could no longer hear the questions from the commission. It was perhaps a fitting end to a brutal line of questioning.
“May I say Chairman, you gave a lights-out performance,” Angelides said, bringing a bit of levity to an otherwise tense morning.