Greenspan's Two Craziest Claims
Alan Greenspan said a lot of nonsense at yesterday's Financial Crisis Inquiry Commission, but two claims jumped out at me. First, he traces the financial crash of 2008 back to the fall of the Berlin Wall. This is simply preposterous. The financial crisis was caused by deregulated banks with tremendous political power engaging in outrageously foolish, and often predatory behavior. There are several acts of deregulation in the 1990s that paved the way for this, but none of them had anything to do with the fall of the Berlin Wall. This claim was an attempt to shift focus away from the regulatory failures of the Fed during the housing bubble and move it onto vast historical trends that would have been impossible to fight. This is simply wrong, but it would be more credible coming from Greenspan had he actually tried to fight anything. Greenspan was in charge at the Fed, he didn't believe in regulating, and he didn't regulate. There was no battle. Second, Greenspan laid the blame for the subprime crisis at the feet of Fannie Mae and Freddie Mac. This is also completely wrong. Fannie and Freddie did get into the subprime game, but they got into it after the big Wall Street banks did. They did buy lots of awful subprime mortgage-backed securities, but only after they saw Wall Street making a killing on them. As Hudson City Bancorp CEO said at a housing conference in December 2008:
I am not going to leave the GSEs out of this either, because they bought a ton of subprime, and they bought it after everybody knew it was subprime. … The GSEs got the picture a little bit later than Wall Street.This doesn't mean the GSE executives weren't jerks, but it doesn't absolve Wall Street from any blame, either. The scope of the GSEs' subprime activities was also much smaller than that of Wall Street. Fannie and Freddie got into the subprime game through purchases of mortgage-backed securities. This did create demand for subprime lenders to actually issue the loans, but it was not nearly as destructive as the machine operating on Wall Street, where banks were getting into subprime from every angle they could. Wall Street firms issued subprime loans, bought supbrime loans from other lenders, packaged subprime loans into securities, bought and sold the securities, and supported specialty subprime lending shops with financing. In short, this is a Wall Street problem. It is absurd to pretend otherwise.