The fall of the Mighty

Reprinted from Business Times

THERE was something pathetic about the testimony by Alan Greenspan, the former chairman of the Federal Reserve, before the House of Representative's Committee on Oversight and Government Reform last Thursday.

Here was the man, who only a few years ago was treated as the Oracle of Delphi by his groupies when he deigned to visit Capitol Hill, was suddenly finding himself subject to harsh criticism and even mean ridicule by the same lawmakers who had worshipped at the feet as the High Priest of American capitalism during most of the roaring 1990s.

The members of the Congressional forum who were cross-examining the 82-year-old ex-central banker sounded at times like inquisitors in a religious tribunal or in a Stalin-era show-trial, pressing a beaten-down witness to confess his sins and to repent.

'You had the authority to prevent irresponsible lending practices that led to the sub-prime mortgage crisis. You were advised to do so by many others,' said Representative Henry Waxman, a Democrat and head inquisitor on the Congressional committee. 'Do you feel that your ideology pushed you to make decisions that you wish you had not made?'

And, indeed, the man who once upon a time was hailed by pundits as the Maestro and the Master of the Universe sounded very apologetic, as though he was pleading for forgiveness. '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.'


Former US Federal Reserve Chairman Alan Greenspan told Congress on Thursday 23 Oct 2008, he is 'shocked' at the breakdown in US credit markets and that he expects the unemployment rate to jump.

Despite concerns he had in 2005 that risks were being underestimated by investors, 'this crisis, however, has turned out to be much broader than anything I could have imagined', Mr Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

'Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief,' he said.

Banks and other financial institutions need public support, such as the recently approved US$700 billion bailout package, to avoid serious retrenchment, he said.

Mr Greenspan was hailed as one of the most accomplished central bankers in US history when he retired in January 2006.

However, his decision to keep interest rates low during his final years at the Fed has been blamed in part for the housing bubble and crash that has led to the current deep financial crisis.

The former Fed chair said stabilisation of US housing markets - a necessary precondition for the economy to heal - is 'many months in the future'.

At the heart of the breakdown of credit markets was the securitisation system that stimulated appetite for loans made to borrowers with spotty credit histories, he said.

'Without the excess demand from securitisers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer,' he said.

'The consequent surge in global demand for US sub-prime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem,' he added.

For the Democrats, Mr Greenspan's Congressional testimony and his ensuing grilling by the lawmakers provided an opportunity to bash the successful drive by the Republican free marketeers promoted by the Fed under Mr Greenspan to deregulate the financial markets. The Democrats blame deregulation for the mess on Wall Street and have focused on the need to reassert government intervention in the markets as part of their agenda in the presidential and Congressional elections. Public opinion polls indicate that most voters seem to be receptive to the Democratic message.

But on another level, Mr Greenspan - who was an intellectual disciple of Ayn Rand, the libertarian novelist and philosopher who celebrated laissez faire capitalism in her writings - created the impression during his appearance that he was experiencing a crisis of faith, suggesting that perhaps he 'made a mistake' when he believed that the financial institutions could be self-regulating.

Hence, a few pundits on the political left compared Mr Greenspan's comments to those made by disgruntled former communists during the 1950s who publicly admitted that their ideological faith had been challenged by reality. But these pundits may be overstating their case by arguing that Mr Greenspan was a free-market doctrinaire and that betrayed by his capitalistic God, he is now defecting to the (ideological) enemy's side.

Working side by side with both who led the efforts to deal with the market crash of 1987 and the dotcom bust crisis of 2000 as well with a series of global financial crises in the 1990s, Mr Greenspan has always exhibited a pragmatic modus operandi. If anything, the former Fed chief has never contested the policy embraced by several Congresses that encouraged consumers through tax benefits and subsidies to buy homes, instead of following Ms Rand's view that choices in the housing market should be made by consumers and financial institutions.

Similarly, Mr Greenspan didn't follow free-market principles when he used the power of the Fed to keep interest rates low and pump cash into the financial markets after 2001. These government-backed policies as much as the deregulatory steps embraced by Washington in the 1990s clearly contributed to the joint housing and financial crises; they provided incentives to consumers and business to make irresponsible choices.

At the same time, it would be an exaggeration to suggest that Mr Greenspan, together with the rest in Washington, is now slouching towards socialism. Even at the height of Reaganism, Washington never abandoned the main tenets of the welfare state that it had adopted in the 1940s. At most, American policy- and law-makers have modified these tenets through some forms of deregulation and tax cuts while maintaining government control of large parts of the economy.

Mr Greenspan did play a role in that process, and now that the pendulum is turning back to the other side, he, like the rest of Washington, is adjusting to a new reality. What's really distressing is we now discover that in addition to not being an intellectual giant, Mr Greenspan was also never a profile in intellectual courage. How the mighty have fallen!