The Crisis, by Alan Greenspan.
It sounds like an airport novel. But the 66-page paper is the closest we’ve ever gotten to a mea culpa from the former Fed chief, who chaired the US central bank in the midst of a growing housing bubble.
As the New York Times reports, Greenspan is due to present the paper at the Brookings Institution on Friday. And this is the bit, according to the NYT, where the sort-of-contrition comes into play:
For years the Federal Reserve had been concerned about the ever larger size of our financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution. A decade ago, citing such evidence, I noted that “megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail.” Regrettably, we did little to address the problem.
Fun fact; the word “regrettably” actually appears a total of four times in the paper.
The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk adjusted capital. Regrettably, the evident potential for gaming of this system calls for an additional constraint in the form of a minimal tangible capital requirement.
Bank regulators are perforce being pressed to depend increasingly on greater and more sophisticated private market discipline, the still most effective form of regulation. Indeed, these developments reinforce the truth of a key lesson from our banking history–that private counterparty supervision remains the first line of regulatory defense.” Regrettably, that first line of defense failed.
And this is our favourite:
We at the Federal Reserve were aware as early as 2000 of incidents of some highly irregular subprime mortgage underwriting practices. But regrettably we viewed it as a localized problem subject to standard prudential oversight, not the precursor of the securitized subprime mortgage bubble that was to arise several years later.
So, Alan Greenspan — no longer fighting back?
Not quite. In the paper, the erstwhile central banker also says he still thinks the Fed’s policy of low (overnight) interest rates was not to blame for the housing bubble, and associated excess risk-taking.
Greenspan hits back at claims he caused the housing bubble – FT
And a round of applause for those who blew up the economy… – FT Alphaville
After the bubble, beauty is but fleeting for Greenspan portraits – WSJ
Less maestro, more ingénue – FT Alphaville