Greenspan: “Shocked Disbelief”

By Robert Borosage

October 24th, 2008

marks the end of an era. Alan Greenspan, the maestro, defender of the
market fundamentalist faith, champion of deregulation, celebrator of
exotic banking inventions, admitted Thursday in a hearing before Rep.
Henry Waxman’s House Committee and Oversight and Government Reform that
he got it wrong.

“Those of us who have looked to the self-interest of lending
institutions to protect shareholders’ equity, myself included, are in a
state of shocked disbelief,” he said.

As to the fantasy that banks could regulate themselves, that markets
self-correct, that modern risk management enforced prudence: “The whole
intellectual edifice, however, collapsed in the summer of last year.”

Greenspan spurned the Republican acolytes trying desperately to
defend the faith and blame the crisis on the Community Reinvestment Act
and the powerful lobby of poor people who forced powerless banks to do
reckless things. Greenspan dismissed that goofiness in response to a
question from one of its right-wing purveyors, Rep. Todd Platts, R-Pa.,
noting that subprime loans grew to a crisis only as the unregulated
shadow financial system securitized mortgages, marketed them across the
world, and pressured brokers to lower standards to generate a larger
supply to meet the demand. Private greed, not public good, caused this

"The evidence now suggests, but only in retrospect, that
this market evolved in a manner which if there were no securitization,
it would have been a much smaller problem and, indeed, very unlikely to
have taken on the dimensions that it did. It wasn’t until the securitization became a
significant factor, which doesn’t occur until 2005, that you got this
huge increase in demand for subprime loans, because remember that
without securitization, there would not have been a single subprime
mortgage held outside of the United States, that it’s the opening up of
this market which created a huge demand from abroad for subprime
mortgages as embodied in mortgage-backed securities".

But having admitted the failure of his faith, Greenspan could not
abandon it. Credit default swaps had to be “restrained,” he admitted.
Those who create mortgages should be mandated to retain a piece of them
to insure responsible lending. Otherwise, the old faith still applied.
No new regulations were needed, because the markets “for the indefinite
future will be far more restrained than would any currently
contemplated new regulatory regime.”

Now hung over from their bender, the banks could be depended upon to
remain sober “for the indefinite future.” Or until taxpayers’ money
relieves their headaches, and they are free to party once more.