WASHINGTON — The Federal Reserve took steps to address the root causes of the financial crisis but was limited in its ability to affect changes, former Chairman Alan Greenspan said Wednesday, even as members of a panel accused the central bank of a "failure to act."
"Was there just a reluctance to regulate, a belief that regulation was not the right tool?" former California State Treasury Phil Angelides asked Greenspan. Angelides, who chairs the Financial Crisis Inquiry Commission, suggested to Greenspan that "you could've, you should've, and you didn't" do enough to rein in poor lending practices.
Greenspan, who left his post as head of the Fed in 2006, countered that the Fed did act to address subprime lending and other issues, but did not have the ability to enforce regulations and was dealing with a number of competing pressures. He took direct aim at members of Congress, who he said seem to be suffering from "amnesia" given their previous efforts encouraging the Fed to increase homeownership.
"I sat through meeting after meeting in which the pressures on the Fed to enhance lending were remarkable," Greenspan said.
But while he insisted that he knows of "no better supervision" operation than that of the Fed, he acknowledged that some mistakes were made: "I was right 70% of the time and wrong 30% of the time."
He also insisted that one of the key lessons of the financial crisis was that regulators, financial services firms and counterparties were all unable to predict the coming tumult, and that there was a "fatal flaw" in the system revealed by that blindness. Regulators by themselves were and are unable to act as the only stabilizer in the financial markets, he said.
"They have to be the first line of defense...If they fail, and they did, it's not a simple issue of saying 'let's regulate,'" Greenspan said of federally regulated firms.
