Lowenstein: Thanks to Greenspan and Bernanke, The Next Crisis Could Be "Even Scarier"

Posted Apr 07, 2010 10:05am EDT
by Peter Gorenstein in Investing,
Updated from 10:05 a.m. EDT
332 Comments

Update: Testifying before the Financial Crisis Inquiry Commission on Wednesday, former Fed chairman Alan Greenspan admitted to making "an awful lot of mistakes" and being "wrong 30% of the time." Still, Greenspan (again) denied the Fed's monetary policy or lax regulatory oversight were the primary causes of the real estate boom and bust earlier this decade.

From the global savings glut to securitization of mortgages and the U.S. government's push for wider home-ownership via Fannie Mae and Freddie Mac, "Greenspan blamed a litany of other parties and historical events for the meltdown but accepted no responsibility for himself or the Fed," The AP reports.

But crisis panel chairman Peter Angelides didn't let Greenspan off the hook: "Why...did you not act to contain abusive, deceptive subprime lending?" asked Angelides, a former California state treasurer. "You could've, you should've and you didn't" act to stop predatory lending practices.

Editor's note: Ahead of the testimony, Tech Ticker spoke with author and longtime Greenspan critic Roger Lowenstein about "the Maestro's" role in the credit crisis.

Earlier: Alan Greenspan is on Capitol Hill today testifying in front of the Financial Crisis Inquiry Commission. The former Federal Reserve Chairman Alan Greenspan has come under increased scrutiny for his failure to anticipate the housing bubble. Roger Lowenstein, author of The End of Wall Street, says the criticism is deserved.

In Lowenstein’s view Greenspan made several key mistakes.

-- Too Low for Too Long: "He never said 'gee maybe we shouldn’t have left rates at 1% three years into a recovery' when housing is rising at double digit rates."

-- Missed the Bubble: "This idea that you should prick a bubble before it gets too big just totally ran against his grain."

-- The Market is Always Right: The root of the problem is that Greenspan "believed deeply in the philosophy that if markets do it, it's right," Lowenstein says. Current Federal Reserve Chair Ben Bernanke deserves some blame for continuing Greenspan’s policies, he says. "Ben Bernanke is absolutely Greenspan light."

What's even more troubling is that the solution to the crisis, engineered by Washington, may be even more catastrophic, Lowenstein says. "What the government may have done is not solve the Wall Street crisis but may have just assumed Wall Street's debt."

Which brings up the real possibility "the next [crisis] could be centered right in Washington [and] could be even scarier," Lowenstein warns.

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