Greenspan admits Fed's policy 'mistakes led to credit tsunami'

Published on Thursday 23 October 2008 21:53

ALAN Greenspan last night confessed that he had made "mistakes" in championing the light-touch US financial regulatory system, which led to what he admitted had become a "once-in-a-century credit tsunami".

The former chairman of the Federal Reserve revealed he had been "shocked" by the breakdown in the US credit markets and conceded that he had been "partially" wrong to resist calls for greater regulation of some securities.

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Giving evidence to a House of Representatives committee, the man who was credited with overseeing an unprecedented era of low-interest rate-driven prosperity in America accepted that he had been wrong in some of his judgments.

Greenspan, who stepped down from the Fed in 2006, told the committee: "We are in the midst of a once-in-a-century credit tsunami." He added he realised his "mistake" when he found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works".

Despite concerns he had in 2005 that risks were being underestimated by investors, Greenspan accepted that the crisis had "turned out to be much broader than anything I could have imagined".

Striking a note of contrition, he added: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity – myself especially – are in a state of shocked disbelief."

Greenspan softened his long-standing opposition to many forms of financial market regulation, acknowledging that he was wrong in his belief that some trading instruments did not need oversight.

He was repeatedly pressed over his statements during his time in office that the market could handle regulation of derivatives without government intervention.

Greenspan admitted that a securitisation system that stimulated appetite for loans made to borrowers with difficult credit histories, was at the heart of the breakdown of credit markets.

"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.

A surge in demand for US subprime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added.

Greenspan argued that regulators could not predict the future or make perfect decisions.

He said: "We cannot expect perfection in any area where forecasting is required. We have to do our best, but cannot expect infallibility or omniscience."

His comments came as the UK government's new Business Secretary put the blame for the crisis firmly on the financial world.

In an interview published today, Lord Peter Mandelson said: "I don't believe what's happened is a market failure in the financial sector, I believe it's a regulatory failure."

But asked who he blamed for the crisis, he replied: "The banks and the regulators, in that order."

Mandelson said that while the problems originated in the United States, the banks in Britain had shown "a lack of prudence, lack of proper risk management".