Greenspan: I was wrong about banks’ capability to police each other
Posted by: in HousingFiled under: International markets, Forecasts, Politics, Housing, Federal Reserve, Financial Crisis
Congressional investigators repeatedly, verbally pummeled former U.S. Federal Reserve Chairman Alan Greenspan Thursday, for what lawmakers charged was a lack of oversight for a mortgage and housing market run amok - - a lapse they believe encouraged a subprime financing boom and collapse that led to the global financial crisis.
Greenspan, looking subdued but characteristically composed as he testified before the House Committee on Oversight and Government Reform, conceded that a flaw in his free-market ideology contributed to a “once-in-a-century credit tsunami,” Bloomberg News reported Thursday.
Greenspan: mortgage risk was miss-priced
The flaw, Greenspan said, was the failure by banks and mortgage lenders to properly price risky mortgage assets, including subprime / Alt-A mortgages, The Washington Post reported Thursday. Further, Greenspan said he saw “no choice” but to force the financial firms that package mortgage loans to “retain a meaningful part of the securities they issue” - - thus mandating that if the loans go bad, they’ll lose money, as well.
Further, Greenspan said he was “partially” wrong in his opposition in recent years to the regulation of derivatives, Bloomberg News reported Thursday - - in stark contrast to his Might 2005 speech opposing derivatives regulation.
Economist David H. Wang told BloggingStocks Thursday that the failure to regulate and review lending practices by banks and mortgage lenders was a bipartisan failure.
“Both political celebrations are responsible because neither Democrats nor Republicans, not just Republicans, cared about the quality of mortgages banks approved during the housing boom,” Wang said. “It was like grade inflation in college where the professor gives ‘C’ grades to students whose work only deserves a ‘D.’ No one cared about the quality of the loans as long as they were sold and no longer on their balance sheet. In the future, loan originators must retain partial equity in the loan to make them accountable for mortgage defaults.”
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