WASHINGTON — When former Federal Reserve Chairman Alan Greenspan stepped down in 2006, he was widely respected for his steady stewardship of the U.S. economy under four presidents. But on Thursday, Greenspan offered a partial mea culpa for today's financial market turmoil.
Greenspan was once called the Maestro for guiding monetary policy as smoothly as an orchestra leader waving a baton. On Thursday, the Maestro became a political punching bag as Rep. Henry Waxman, D-Calif., the chairman of the House Committee on Oversight and Government Reform, read the 82-year-old former Fed chief statements that he'd made in favor of less regulation and the belief that markets police themselves.
"My question for you is, so, were you wrong?" asked Waxman, opening what became a partisan question-and-answer session where Democrats and Republicans angrily blamed each other for the current crisis.
After taking a deep breath, Greenspan responded, "Well, partially."
He explained that many of the exotic financial instruments — such as the insurance-like credit-default swaps that have exacerbated the housing meltdown — were not yet common when he expressed his views about markets being able to police themselves.
"I made a mistake in presuming that the self interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders and the equity in the firms," Greenspan said.
Having run the world's most powerful central bank from 1987 to 2006 — under four presidents, three Republicans and a Democrat — Greenspan acknowledged that views he's long held are now in question.
"The problem here is that something that looked to be a very solid edifice and indeed a critical pillar to market competition and free markets did break down. And that, as I said, shocked me and I don't fully understand why it happened," he said. "And to the extent I figure out where it happened and why, I will change my views. And if the facts change, I will change."
Word of Greenspan's confession spread quickly in Washington, where until recently he was treated as royalty. His critics quickly pounced.
"After years of confrontation about the role of government regulation, I'm glad to see he now recognizes that his ideas are flawed," Sen. Bernie Sanders, an independent from Vermont and frequent Greenspan sparring partner, said in a statement.
"We are in the midst of a once-in-a-century credit tsunami," Greenspan said in his opening statement.
Separately, one of the nation's top bank regulators told Congress on Thursday that the federal government could provide loan guarantees for reworked mortgages as a way to ease the national housing crisis that's at the heart of the global financial turmoil.
Federal Deposit Insurance Corp. Chairman Sheila C. Bair, an early and vocal advocate of more aggressive steps to prevent foreclosures, told the Senate Banking Committee that more could be done to keep people from losing their homes. Her suggestions, however, weren't fully embraced by the Treasury Department, which is leading the Bush administration's financial market rescue efforts.
While Waxman's hearing looked backward, the Senate Banking Committee heard from Bair and the little-known Treasury official charged with running the new congressionally approved rescue effort, Neel Kashkari. He outlined the steps already taken since last month's legislative passage, but stopped short of embracing Bair's loan-guarantee plans.
The FDIC chief has frequently challenged the Treasury Department to be more aggressive in helping to modify distressed mortgages and prevent foreclosures. On Thursday she told senators that the $700 billion Emergency Economic Stabilization Act passed by Congress last month empowers the Bush administration to provide loan guarantees for lenders or their agents, called servicers, that rework problem mortgages.
"Loan guarantees could be used as an incentive for servicers to modify loans," she said, repeating a suggestion offered earlier in the week by current Fed Chairman Ben Bernanke. "Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards."
Bair testified that her agency has been servicing a pool of 712,000 mortgage loans since it took over the failed IndyMac Bank on July 11. As a conservator, the FDIC suspended most foreclosure actions in search of a solution, she said, implying that Treasury could do the same when it begins buying troubled mortgage loans as allowed by Congress.
The White House said that Bair's ideas are among several approaches that are likely to be used. "These are all things we can do, are doing, and we're looking at ways to do still more effectively," said spokesman Tony Fratto.
Late Thursday, Treasury officials briefed members of the House Financial Services Committee on efforts to begin buying troubled mortgage assets. The officials didn't mention mortgage loan guarantees, according to a person present who spoke on the condition that they not be identified given the private nature of the briefing.
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