Energy Finance

Former federal reserve chairman Alan Greenspan said at a congressional hearing today that a flaw in his free-market ideology contributed to a “once-in-a-century credit tsunami,” according to Bloomberg News.

“I found a flaw,” Greenspan said. “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 said he was partially wrong in his opposition to the regulation of derivatives. In May 2005, he said “private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.”

Committee Chairman Henry Waxman, a California Democrat, pointed the finger at Greenspan by saying he “had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis.”

“You were advised to do so by many others,” he told Greenspan. “And now our whole economy is paying the price.”

Greenspan now says that firms that bundle loans into securities for sale should be required to keep part of those securities, and should create rules for settlements and to discourage fraud.

Greenspan said that financial companies failed to execute sufficient surveillance’ on their trading counterparties, and the breakdown’ was where securities firms packaged home mortgages.

Greenspan said, “As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,” giving the companies an incentive to ensure the assets are properly priced for risk.

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.