In yet another public cry of innocence, Alan Greenspan tries to explain why he was not a fault for the two asset bubbles his policies helped to inflate unchecked. The overall gist of his piece is that he believes "bank regulators cannot fully or accurately forecast whether, for example, sub-prime mortgages will turn toxic, or a particular tranche of a collateralised debt obligation will default, or even if the financial system will seize up. A large fraction of such difficult forecasts will invariably be proved wrong." So, he concludes, since the bank regulators can't forecast these problems consistently, it's not his fault that everything that now plagues our economic system went wrong during his tenure.
He goes on to say, "I feared 'irrational exuberance' in 1996, but the dot-com bubble proceeded to inflate for another four years. Similarly, I opined in a federal open market committee meeting in 2002 that 'it's hard to escape the conclusion that . . . our extraordinary housing boom . . . financed by very large increases in mortgage debt, cannot continue indefinitely into the future.' The housing bubble did continue to inflate into 2006."
The big question is if he noticed the problem, why did he choose not to act to prevent the further inflation of these bubbles. Instead, he allowed the excesses to continue, as riskier and riskier mortgages were designed helped to inflate the housing bubble.
The Federal Reserve had the responsibility to protect the public from these risky mortgage designs as part of its credit protection mandate. Yet the Fed chose not to act and ignored the warnings that even Greenspan now admits he saw. One of Ben Bernanke's first acts was to impose stricter regulations on mortgages to prevent these excesses in the future.
Greenspan goes on describe how the speculative fever of bubbles "builds on itself, seeking new unexplored, leveraged areas of profit. Mortgage-backed securities were sliced into collateralized debt obligations and then into CDOs squared. Speculative fever creates new avenues of excess until the house of cards collapses. What causes it finally to fall? Reality."
The way he talks, he sounds like some omniscient god who begs off when it comes to the question of man's free will. This "I knew all, but it wasn't for me to choose" stance really adds a whole new dimension to the deification of the former Fed chief in some circles.
Greenspan insists that he knows of "no instance where incremental monetary policy has defused a bubble." How would he know? If a bubble was successfully defused, then it wouldn't have been a bubble. Again, following his logic is enough to make your head hurt.
I think it's time for Greenspan to slip quietly from the stage. While I'm not saying this mess is entirely his fault, he certainly did little to prevent it even though he was the one manning the economy's levers. And if he can't bring himself to admit at least that much, he needs to zip it.
Lita Epstein has written more than 25 books, including the Complete Idiot's Guide to the Federal Reserve.