Greenspan Admits Error

A chastened Alan Greenspan admitted to Congress on Thursday that his deregulatory ideology was largely to blame for the current financial crash. Speaking before Rep. Henry A. Waxman's (D-CA) House Committee on Oversight and Government Reform, the former Fed Chairman said, "Those of us who looked to the self-interest of the lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."

Waxman presented a lengthy list of Greenspan's pronouncements over the years cautioning against regulating subprime lending and derivatives. He then stated, "You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others." Waxman then pointedly asked, "Do you feel that your ideology pushed you to make decisions that you wish you had not made? Greenspan replied, "Yes, I've found a flaw. I don't know how significant or permanent it is. But I've been very distressed by that fact."

Greenspan conceded, "The whole intellectual edifice" of risk management, "collapsed in the summer of last year." He went on to agree that such instruments and markets needed to "be restrained." Returning to Greenspan's earlier pronouncements against the need for regulation, Waxman asked, "Were you wrong?" Greenspan responded by saying, "Partially," and, as Edmund Andrews of the New York Times reports, "before trying to parse his concession as thinly as possible."

It had to be quite a humiliating experience for the man who until recently was regarded with an almost mystical aura of sagacity when he periodically went to Capitol Hill to offer his typically cryptic and veiled comments on the money supply, markets, interest rates and the other arcana of the financial world. Mr. Greenspan deserves some credit for his candor, but going forward the lesson for the rest of us should keep a close watch on what the new congress and administration come up with to prevent recurrence of the irresponsibility that led us to our present difficulties. Allowing the industry to be self-policing should by now be a thoroughly discredited notion.