In his testimony before the Financial Crisis Inquiry Commission this morning, Alan Greenspan masterfully blamed everyone but the Federal Reserve for their role in the blossoming of the subprime mortgage market and the ensuing financial collapse. It was an amazing performance in the technique of covering your ass.
Greenspan blamed Fannie Mae and Freddie Mac for doggedly advancing the idea of homeownership for everyone, while ignoring the warning signs of investing in subprime mortgage–backed securities. He blamed the banks and large financial institutions for not keeping enough cash on hand to cover their losses when the market plunged, and he blamed the credit-rating agencies for giving high marks to suspect financial products. You can read the full text of his prepared testimony here. Later, during the question-and-answer period, he even blamed Congress, which does not actually oversee the Fed. Still, Greenspan said it was Congress that politically pressured the agency to keep interest rates low to encourage lending.
A few days ago, Paul Krugman wisely asked why Greenspan still cannot take responsibility for his actions during his tenure as the Federal Reserve chairman from 1987 to 2006. Today's much-anticipated appearance before the commission left many wondering the same and certainly raises questions about Greenspan's future legacy. Even if the Federal Reserve is not an enforcement agency, per se, like the SEC or the Justice Department (as Greenspan points out on page 17 of his testimony), the agency does have leeway to prohibit unfair mortgage practices, and let's not forget that the Federal Reserve sets interest rates.
Policy aside, it also needs to be said that Alan Greenspan is Alan Greenspan. If he had started raising questions about the subprime mortgage market in 2004 to 2006, when that type of lending peaked, people would have listened. Why didn't he use the bully pulpit of his agency and his well-known mug to call attention to the problem? If he had, he could have morphed into an outspoken regulator or a folk hero for the middle class like Elizabeth Warren. Even if he's not a populist, calling attention to subprime-mortgage lending could have, at least, showed off his intellectual prowess as an economist. If the Financial Crisis Inquiry Commission is going to delve into the causes of the great recession in any meaningful way, it will need the cooperation, candor, and genuine insight of the country's—for better or worse—leading economic figures.