Greenspan admits ideology 'flaw'

Ex-Fed chief says free markets do have their faults

Former Fed chairman Alan Greenspan testifies before a House committee yesterday. Also testifying with Greenspan are SEC chairman Christopher Cox (center) and former Treasury Secretary John Snow. (Kevin Lamarque/Reuters)

WASHINGTON - Former Federal Reserve chairman Alan Greenspan said a "once-in-a-century credit tsunami" has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

"Yes, I found a flaw," Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. "That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Greenspan acknowledged he was partially wrong for opposing the regulation of derivatives over the years. A former Fed chairman normally afforded deference by Congress endured almost four hours of questions from lawmakers seeking a scapegoat for the financial crisis less than two weeks before a national election.

Part of the problem was that the Fed's ability to forecast the economy's trajectory is an inexact science, he said. The admission that free markets have their faults was a shift for the former Fed chairman, who declared in a May 2005 speech that "private regulation generally has proved far better at constraining excessive risk-taking than has government regulation."

Committee chairman Henry Waxman, a California Democrat, said yesterday that Greenspan had "the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis."

Former Fed governor Edward Gramlich, who died in 2007, had urged Greenspan to strengthen oversight of banks during the record US mortgage boom from 2004 to 2006.

Questioned about those warnings, Greenspan said, "Governor Gramlich said to me that he had problems" and that he left the meeting expecting a Fed subcommittee dealing with consumer and community affairs to present recommendations, which didn't occur. "I presumed at the time that essentially the subcommittee didn't think it rose to the higher level" requiring action, Greenspan said.

Greenspan opposed increasing financial supervision as Fed chairman from August 1987 to January 2006. Policy makers are now struggling to contain a financial crisis marked by record foreclosures, falling asset prices, and almost $660 billion in write-downs and losses tied to US subprime mortgages.