April 7, 2010 11:21 AM

Greenspan Before The FCIC: A Trip To The Land of Denial

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

Here we go -- another meeting of the Federal Crisis Inquiry Commission (FCIC). As we speak, former Federal Reserve Chairman Alan Greenspan continues to shuck and jive in a feeble attempt to restore his reputation.

Alan Greenspan

(Credit: AP)

Early in the testimony, Greenspan claimed that in his career, he was "70% right and 30% wrong", but when asked whether his action (or inaction) in the years leading up to the crisis would be put in the 30% category, he said "I don't know." Mr. Greenspan, I think we know. You were not the solitary cause of the crisis, but many of your decisions and core values, which prevented smart regulation, contributed to an environment that allowed the crisis to occur.

It's mind-blowing that the former "Maestro" is incapable of owning up to any responsibility in his role in fostering the financial crisis. In his prepared remarks, Greenspan noted that the securitization of sub-prime and alt-A mortgages, whose surge was fueled by Government Sponsored Entities Fannie Mae and Freddie Mac. Greenspan noted that the two giants bought 40% of these toxic assets, which is why in 2004, he argued for limiting GSE purchases of these types of toxic debt.

Really? In a September 2007 "60 minutes" interview, Greenspan said "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late." Which is it? Did he think it was a problem in 2004 or not?

Let's agree for a moment that FNM and FRE contributed to the problems-they did. In his opening question, FCIC Chairman Phil Angelides outlined series of warning signs that were brought to Greenspan starting in 1999, which of course begs the question, why didn't the Fed take action to regulate these worrisome products? All well and good that Greenspan issued guidance, but without regulation, how exactly would change occur? Nice comeback from Angelides-"You could've, you should've and you didn't."

When asked about the Fed's low interest policy (Greenspan never encountered a problem that easy monetary policy couldn't solve), which many describe as "too low for too long," Greenspan responded that mortgage rates are based on long term interest rates, over which the Fed had little control. In other words, keeping short term rates low had nothing to do with inflating the housing bubble.

Does anyone else remember early 2004, when Greenspan extolled the virtues of adjustable-rate mortgages? You know, the ones that are based on short-term rates? In a speech before the National Association of Homebuilders, he said "traditional fixed-rate mortgage may be an expensive method of financing a home...homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages over the past decade." It was as if Greenspan was doing a paid announcement for the mortgage industry-the subtext was "can't afford a house with a traditional mortgage? Go get yourself an adjustable rate, or any other cheap money, to get what you want!"

On the regulatory front, it was clear that Greenspan, the Ayn Rand-loving, free-market cheerleader, was almost constitutionally incapable of hearing the problems that existed in the shadow banking system. In Congressional testimony on February 10, 2000, Greenspan said about derivative regulation:

But it was agreed that creation of a regulatory system for such systems in anticipation of problems was inappropriate. As I have already noted, the vast majority of OTC derivatives simply are not susceptible to manipulation.

Um, any interest in restating that 70% right and 30% stat now, Mr. Greenspan? I guess not.

This testimony laid out Greenspan's position and of course was the reason that later in 2000 he and Clinton officials Treasury secretary Robert Rubin, Larry Summers (Rubin's deputy at the time) and SEC chairman Arthur Levitt, ganged up on CFTC Chair Brooksley Born to thwart derivative regulation. Now, Born's concerns seem eerily prescient. But in the end, her goal of monitoring over-the-counter derivatives transactions-you know, like the ones that brought down AIG-failed. Sadly, I couldn't listen long enough to hear FCIC member Ms. Born's question her prior nemesis Greenspan-suffice it to say, we know which player history proved correct.

If only Greenspan could look us in the eye and say, "you know what? I get it now...I couldn't see it then, but I was wrong and here's what needs to happen to prevent a future crisis..." Fat chance-instead Greenspan led us through yet another tour of the land of denial.

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Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.