Alan Greenspan, the economic sage and former chair of the Federal Reserve, has been on a mission to set the record straight on the financial crisis—not least his own role in it. In March, the Brookings Institution published a detailed, 66-page paper (pdf) he authored on the crisis’ origins. Most recently, he used a three-hour hearing on Wednesday by the congressionally-chartered Financial Crisis Inquiry Commission (FCIC) to discuss how subprime mortgages and securitization fueled the meltdown. Except Greenspan hasn't been describing recent history so much as rewriting it.
Greenspan, who chaired the Fed from 1987 to 2006, has received plenty of blame and opprobrium for the central bank's role in the subprime meltdown and broader economic crisis. The Fed, critics say, failed to rein in abusive practices by subprime lenders by choosing not to flex its regulatory muscle. For a time, it let credit card companies off the hook with a 2004 ruling that overdraft fees weren’t loans, and thus not subject to fair lending law. Consumer advocates also say Greenspan’s policy of keeping interest rates low during the 2000s paved the way for the housing bubble.
But reading Greenspan's testimony before the FCIC, you'd think the Fed was the Lone Ranger of regulators, a vigilant crusader on behalf of homeowners raising red flags about toxic mortgage products and the looming housing bubble. He touted the Fed's actions under a 1994 law called the Homeownership Equity Protection Act (HOEPA) that gave the Fed the power to prohibit "unfair," "abusive," and "deceptive" mortgage lending practices. "My colleagues at the Federal Reserve were aware of their responsibilities under HOEPA," Greenspan said, "and took significant steps to ensure that its consumer protections were faithfully implemented."
During his near 20-year reign at the helm of the Federal Reserve, Alan Greenspan was among the world's leading proponents of the free market ideology—that governments and regulators shouldn't meddle in the markets, and instead let the financial industry regulate and run itself. You know, Adam Smith's invisible hand, Milton Friedman and the Chicago school, all that. Observers point to a slew of Greenspan's decisions during his tenure at the Fed—his backing of massive financial deregulation, like the Gramm-Leach-Bliley Act in 1999, and belief that financial institutions could oversee themselves—as evidence of his free market beliefs impacting his work at the Fed.
In the wake of the crisis, Greenspan admitted that he'd found a "flaw" in his free market worldview. Big banks, investment houses, non-bank institutions, and so on couldn't control themselves, Greenspan said; enhanced regulation was needed. It was presumed, at the time of Greenspan's concession, that he was repudiating the ideology that guided his leadership at the Fed.
Today, however, Greenspan rejected altogether the notion that his free market mentality at all inflected tenure at the Fed. When asked by Brooksley Born, the former chair of the Commodity Futures Trading Commission, whether his ideology led to the Fed's laissez faire approach to regulation and failure to stop the housing bubble, Greenspan replied, "It didn't look that way from my point of view." Greenspan countered that he was only doing what Congress told him to do, and enforcing the laws already in place. "I ran my office as required by law, and there's an awful lot of laws that I wouldn't have constructed in the way they were constructed, but I enforced them nonetheless because that was my job," he said.
Sure, in one sense, Greenspan essentially played the hand he was dealt. However, no one can forget how influential he was the apogee of his Fed tenure. His support for bills like Gramm-Leach-Bliley no doubt impacted their passage. Thus his claim today is one that many of Greenspan's critics will surely take issue with. What's more, for the growing chorus of critics who say that Greenspan, in recent months, has launched a campaign to whitewash his and the Fed's record, this latest pushback is sure to give those critics even more ammunition.
Alan Greenspan, the dour former chairman of the Federal Reserve, joined the growing ranks of financial experts saying we can't rely on "fallible" human regulators to rein in Wall Street under the re-drawn lines of new financial regulation. (That is, if we get new financial regulations.) Greenspan's remarks came as part of his testimony today before the Financial Crisis Inquiry Commission, a Congressionally-mandated panel investigating the root causes of the financial crisis.
A former regulator himself, Greenspan told the FCIC, led by former California state treasurer Phil Angelides, that new financial safeguards should require higher capital cushions to absorb losses and force banks to have more skin in the game on their trades. "Concretely, I argue that the primary imperatives going forward have to be on increased risk-based capital and liquidity requirements and significant increases in collateral requirements irrespective of the financial institutions making the trades," Greenspan said. "Sufficient capital eliminates the need to know in advance which financial products or innovations will succeed in assisting in effectively directing a nation's savings to productive physical investments and which will fail. He added, "In a sense, [capital requirements] solve every problem." Asked about what kind of capital requirements are needed, Greenspan didn't offer any specific figures but said only they needed to be "adequate."
Greenspan's views on financial regulation come, in part, as the former Fed chairman defends his record, despite widespread criticisms that he missed the housing bubble's genesis and failed to crack down on subprime lending. In his written testimony, Greenspan countered by saying he warned of the "housing boom" as early as 2002, and that the Fed took significant steps to crack down on a subprime market that, in the 2000s, spiraled out of control. However, Greenspan stressed, as he has before, that he himself, as well as any regulator, can never fully predict the next crisis, and that cold, hard capital restrictions are the key to preventing the next meltdown.
A week after Sarah Palin stood in his hometown and called for his ouster, Senate Majority Leader Harry Reid (D-Nev.) let one fly at the former Miss Wasilla in a recent campaign speech. "I was going to give a few remarks on the people who were over here a week ago Saturday," said Reid in a clip posted by Fox News, "but I couldn't find it written all over my hands." (A reference, of course, to Palin's choice to write interview notes on her hand.) The veteran Nevada senator, appearing at what looks like an old-timey diner of sorts with cushy leather booths and kitschy Western wall art, also dropped a "You betcha" into his remarks by way of poking fun at Palin, the 2008 vice presidential candidate for the GOP.
Reid, to be fair, owed it to himself to fire back at Palin and the Tea Partiers who'd descended on dusty Searchlight, Nev., last weekend for, among other things, a Harry Reid Bash Fest 2010. As our own Tim Murphy, on the scene in Searchlight, wrote, "Nearly every single one of Harry Reid's potential GOP challengers were given five minutes to make they case for why they disliked Searchlight's native son the most." Hitting back at Palin was the least Reid could do. (To watch the video clip, click here.)
In all seriousness, though, Reid had better be ready to remove the kid gloves on the campaign trail. A Rasmussen poll released Monday shows that Reid trails by 15 percentage points in a potential Senate match-up with Sue Lowden, the former chair of the Nevada GOP. In the poll, Lowden claimed 54 percent of support (a 3 percent increase from early March), while Reid had a mere 39 percent (a 1 percent increase).
Of course, the midterm elections are eight months away; an entire race can be won, lost, then won again between now and November. But the last thing Harry Reid wants is to find himself in a hole against Lowden when Congress shifts from policymaking to full-blown campaigning mode later this summer.
Democrats locking horns on financial reform are in a pickle. As Politico reports today, some Dems with a hand in crafting the Senate's Wall Street overhaul have begun to doubt whether a Memorial Day deadline is at all realistic for delivering a bill to President Obama. And they're probably right: That would mean a majority in the Senate agreed to a politically palatable bill, passed it, then both the House and Senate reconciled their two pieces of legislation and sent the combined bill to the president. In a little under two months. When it took the Senate banking committee, led by Sen. Chris Dodd (D-CT), far longer just to get out of committee.
The fear among Democrats, the Politico story highlights, is that a May 31 deadline, which the administration put in place, will imbue financial reform talks with the same partisan flame-throwing that so marred the health care debate. Ditching the deadline, worried Dems say, could allow for improved negotiations and a better shot at a bipartisan financial reform bill. It might also blunt the public blowback seen with the health care bill's passage. A number of outsiders—lobbyists, former government officials—quoted in the Politico story say the deadline was more a rhetorical flourish than anything, an effort by Obama and Co. to keep Congress' talks moving at a rapid clip.
Not only that, but there's the fear that any major legislation considered after Memorial Day will be overtaken by campaigning for the looming fall elections. That's certainly true for vulnerable Dems—those who voted for health care, for instance—who'll be spending much of the second half of 2010 clawing to keep their seat and, inevitably, less concerned about systemic risk and capital restrictions and consumer protection agencies. It's sad, but a reality—especially in what's shaping up to be a tough midterm election for Democrats, among them those fighting for financial reform.
Of course, no one who's closely followed financial reform believes the Memorial Day deadline means anything. After all, Dodd said early last year that he expected a financial bill to be completed by year's end. Well, it's April 2010, and the full Senate hasn't even begun talks. What remains to be seen, and what really matters, is whether the Democratic leadership will be able to juggle writing new financial reforms and helping party members campaign to keep their seats. It's a balancing act that could land them what they want on both accounts.