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Alan Greenspan admits flaw in ideology.

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Greenspan admits 'flaw' in ideology

Greenspan said he was in a 'state of shocked disbelief' [AFP]

Alan Greenspan, the former US federal reserve chairman, has publicly admitted that the US free-market ideology that he and others have championed for decades is flawed.

Greenspan, who headed the US central bank for more than 18 years, said on Thursday he had "found a flaw ... in the model that I perceived is the critical functioning structure that defines how the world works".

The admission is one of the most significant comments made by a key architect of the world financial system that is now in chaos amid the global economic crisis.

His comments came as he gave evidence to the US House committee on oversight and government, which is seeking to discover if regulatory failings had contributed to the turmoil.

Henry Waxman, the committee chairman, asked Greenspan: "You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crises. You were advised to do so by many others and now the whole economy is paying its price.

"Do you feel that your ideology pushed you to make decisions that you wish you had not made?"

Greenspan replied: "Yes I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact."

Greenspan 'grilled'

Al Jazeera's John Terrett, reporting from New York, said: "Greenspan used to be treated like a returning victorious general every time he went to Capitol Hill.

"During his 20 years as head of the US central bank, the Federal Reserve, Americans never felt better off.

"Today, it wasn't quite like that. It was a very different Alan Greenspan who was dragged back to Capitol Hill and grilled ... in came hostile questions about unfettered lending and lack of oversight.

"Gone was the usual deference for the man considered chief architect of America's 80s and 90s boom years.

"Greenspan said he was shocked at the banks' inability to self-regulate themselves and blamed over-eager investors for the sub-prime housing meltdown that led to the financial crisis."

Greenspan's critics had accused him of leaving interest rates too low in the early part of the decade, spurring an unsustainable housing boom which went largely unregulated.

'Credit tsunami'

Admitting to the "flaw" in his free-market ideology, he 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."



How the financial bubble burst

Q&A: The US financial meltdown

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Wall Street gripped by uncertainty

reenspan also said that the current crisis had "turned out to be much broader than anything that I could have imagined".

He said that the current global financial crisis was a "once-in-a-century credit tsunami" which will have a severe effect on the US economy and drive unemployment higher.

He admitted he had also been "partially" wrong in opposing the regulation of derivatives in recent years.

He was joined by John Snow, the former treasury secretary, and Christopher Cox, the securities and exchange commission (SEC) chairman.

Henry Waxman, the House oversight committee chairman, said that he believed that the Federal Reserve, which regulates banks, the SEC and the treasury had all played a role in contributing to the mistakes.

Many mistakes

Waxman, a Democrat, said: "The list of mistakes is long and the cost to taxpayers is staggering.

"Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible."

In his testimony, Greenspan blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said.

"Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

Bailout 'adequate'

Greenspan said that a necessary condition for the crisis to end will be a stabilisation in home prices, but he said that was not likely to occur for "many months in the future".

When home prices finally stabilise, Greenspan said, then "the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk".

Greenspan said until that occurs, the government was correct in moving forward aggressively with efforts to support the financial sector.

He called the $700bn rescue package passed by the US congress on October 10 "adequate to serve the need" and said that its effect was already being felt in the markets.

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Yes, the flaw in the system is that he never thought bankers would be DUMB enough to lend money to people who couldn't possible pay it back. Now that these stupid business men have been saved by the socialists in Washington it'll just serve as a sign that it can happen again. We should have allowed them to collapse, and we can all be laughing at business men who can't figure out how to be profitable in an industry that has thrived for as long as this country has existed.

Even in the great depression the majority of banks survived, the ones run my idiots are the ones that failed. Human beings will always be the weakest link in the chain.

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Yes, but let's not forget that Soviet socialism is similar to African capitalism. Exposes the flaws in their particular idealogies, leads to mass poverty and genocide. At least the Soviets didn't have to deal with a significant brain drain or rampant political corruption.

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  • 2 weeks later...

true, but any bank applying for a merger with any other bank is judged for CRA compliancy before the merger is allowed. If a small investment bank wants to grow, they have to lend to even more subideal customers than they'd prefer to.

"For example, a few years ago, NCRC helped a community group in West Virginia comment on a CRA exam of a regional lender. This lender almost failed its CRA exam and its merger application was held up for about one year. As a result of this pressure, the bank improved its CRA record and made significantly more loans and investments in traditionally underserved communities"


uhhh...I couldn't read the article but I'm assuming the title is legitimate!!


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