Greenspan Says Fed, Regulators ‘Failed’ During Financial Crisis

From Business Week.com:

Former Federal Reserve Chairman Alan Greenspan said the central bank and other U.S. regulators “failed” during the financial crisis because they became too complacent about risks.

“Even with the breakdown of private risk-management, the financial system would have held together had the second bulwark against crisis -- our regulatory system -- functioned effectively,” Greenspan said in the text of a speech at a Brookings Institution conference today. “But, under crisis pressure, it too failed.”

Greenspan echoed comments he made in a paper released yesterday citing the central bank’s failures to rein in the housing bubble and growth of the largest U.S. banks. Greenspan, 84, who ran the central bank from 1987 to 2006, said low interest rates weren’t to blame for inflating the bubble, placing the blame instead on regulators.

“Even though for years our largest 10 to 15 banking institutions have had permanently assigned on-site examiners to oversee daily operations, many of these banks still were able to take on toxic assets that brought them to their knees,” Greenspan said.

The former central bank chief said he and others at the Fed didn’t fully understand the extent of the housing bubble and its ramifications for the economy. In October 2008 testimony before Congress, he said free-market ideology may be flawed in the wake of a “once-in-a-century credit tsunami.”

Greenspan: No McCain tax cuts without reduction

From the Associated Press:

Alan Greenspan says the country cannot afford tax cuts of the magnitude proposed by Republican presidential contender John McCain — at least not without a corresponding reduction in government spending.

"Unless we cut spending, no," the former Federal Reserve chairman said Friday when asked about McCain's proposed tax cuts, pegged in some estimates at $3.3 trillion.

"I'm not in favor of financing tax cuts with borrowed money," Greenspan said during an interview with Bloomberg Television. "I always have tied tax cuts to spending."

McCain has said that he would offset his proposed cuts — including reducing the corporate tax rate and eliminating the Alternative Minimum Tax that has plagued middle-class families — by ending congressional pork-barrel spending, unnecessary government programs and overhauling entitlement programs such as Medicare and Social Security.

Democrats pounced on Greenspan's comments, in part because McCain professed last year that he was weaker on economics than foreign affairs and was reading Greenspan's memoir, "The Age of Turbulence," to educate himself.

"Obviously he needs to go back to that book and study it some more," Sen. Claire McCaskill, D-Mo., said during a conference call arranged by the campaign of Democratic nominee Barack Obama.

McCaskill said eliminating congressional earmark spending — estimated at $17 billion annually — cannot offset McCain's proposed tax cuts.

“Repel the calls to contain competitive markets” Claims Alan Greenspan

Last week, Alan Greenspan penned this article in the Financial Times discussing the current mood on the economy and calls for regulation in the lending industry. Below is an excerpt from the article.

“The surprise of recent months is not that global economic growth is slowing, but that there is any growth at all. The credit crunch of the past year has not followed the path of recent economically debilitating episodes characterized by a temporary freezing up of liquidity – 1982, 1989, 1997-8 comes to mind. This crisis is different – a once or twice a century event, deeply rooted in fears of insolvency of major financial institutions.

This crisis was not brought to closure by the world’s central banks’ injection of huge doses of short-term liquidity. Only when sovereign credits were substituted for private bank credit, first in the case of the UK (Northern Rock) and subsequently in the case of the US (Bear Stearns), was a semblance of stability restored to markets. But the London Interbank Offered Rate spreads on overnight index swaps and credit default swaps of financial institutions have not returned to the modest pre-crisis levels. Fears of insolvency have not, as yet, been fully set aside. There may be numbers of banks and other financial institutions that, at the edge of defaulting, will end up being bailed out by governments.

The insolvency crisis will come to an end only as home prices in the US begin to stabilize and clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities. However, US home prices will stabilize only when the absorption of the huge excess of single-family vacant homes that emerged as the US housing boom peaked in 2006 is much further advanced than it is now. New single-family home completions are currently barely under the rate of home demand generated by household formation and replacement needs. Only later this year will the current suppressed level of housing starts be reflected in completion levels consistent with a rapid rate of liquidation of the inventory glut, and this, of course, assumes that current levels of demand for housing hold up.”