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Greenspan and the Guilt of Others

by Felix Wadewitz Saturday, May. 01, 2010 at 6:52 PM

Before the committee, Greenspan immediately went on the offensive (cf. Creole trick). The irresponsible loans of banks caused the crisis, not the low interest of the Fed. The Fed failed in regulating the banks because its employees were not neutral.


The Maestro became the bogeyman of the financial markets. Before the US Congress, the ex-chairman of the Federal Reserve fought for his reputation and lost. The respect of the US public for the former chairman Alan Greenspan has fallen enormously.

By Felix Wadewitz

[This article published in: DIE ZEIT 4/7/2010 is translated from the German on the Internet,]

Seldom have the traders on Wall Street criticized so much. “He only tries to save his backside.” This is not about Tiger Woods. Things are far more complex with Alan Greenspan. A few ordinary tees are not enough to reconcile the world with him.

Nothing offers so many topics of conversation as the fall of a superstar who for years was the standard of all things. Alan Greenspan was once the admired Maestro, Mister Dollar. He was regarded as nearly unimpeachable when he retired in 2006 after nearly twenty years at the helm of the Federal Reserve.

He had kept inflation low. He brilliantly mastered the stock market crash of October 1987. He gave America one of the longest growth phases of its history. After September 11, 2001 he saved the world economy from a recession by drastically lowering the interest rate.

Then the financial crisis erupted. Starting from the US housing market, the crisis quickly seized the whole world. Banks like Lehmann Brothers went bankrupt or had to be bailed out by the state like Hypo Real Estate in Germany. The taxpayer held out his head for financial market bets that were disasters and which he did not even know existed.

Greenspan landed right behind the speculators on the list of scapegoats. Greenspan first made possible the bubble on the housing market with his low interest policy for years and thus provoked the crisis. This was a central reproach. The banks had vast amounts of money so they gave loans to people who could not really afford them.

To delete the risk from their own books as fast as possible, the banks bundled these and other credits in packages whose contents were hardly reviewed and quickly sold them again. The Federal Reserve saw all this and should have prevented it, it is said now.

That Greenspan does not blame himself for anything is even more serious. He is “still not a Mensch,” Nobel Prize winner Paul Krugman decried in his blog – because the ex-Federal Reserve chairman did not simply say he was sorry.

The old man did not want to stand for all this. On Wednesday he faced a Congressional investigating committee on the financial crisis. He came to save his life work.

For weeks, he prepared for his appearance in the media. Firstly, the Brookings Institute published one of his papers in which he defended himself and his official acts. Then he toured through the Sunday political talk-shows on television.

Before the committee, Greenspan immediately went on the offensive. The irresponsible loans of banks caused the crisis, not the low interests of the Federal Reserve. Greenspan pointed to the semi-state mortgage giants Fannie Mae and Freddie Mac that accumulated toxic credits for years. However the Fed had no resources to better regulate these processes.

Many doubt this statement. “I would scrutinize every word of his a hundred times,” said Robert Auerbach of the University of Texas who wrote a critical book about the Federal Reserve under Greenspan’s leadership. The Fed failed in regulating the banks because its employees were not neutral.

For years it was common for the inspectors of the Fed to be uncritical in their visits to the banks. From Auerbach’s view, what is scandalous is that Greenspan found everything completely okay. Auerbach concluded: “The Fed always turned away when something dirty could be seen.”

Therefore the interrogation on Wednesday only focused on the margins. The committee chairperson Phil Angelides put some internal documents under Greenspan’s nose that revealed the Fed failed to limit deceptive awarding of credit – although it had the power to do that. “They could and should have regulated that but did not,” Angelides declared.

That seemed to leave Greenspan cold. In his term in office he “made terribly many mistakes” but no examples occurred to him regarding the financial crisis. Instead the rating agencies had responsibility since they wrongly assessed the risks of credit packages. The government pressed Fannie and Freddie to help as many people as possible in buying a home.

“All cow-dung,” trader David concluded. “Everyone blames the others and at the end no one is responsible.”

The television programs on Thursday promised more excitement. Golfer Tiger Woods will celebrate his return. If the athlete wins the Masters Tournament in Augusta, the extra-marital affairs will be forgotten. Americans love comeback stories.

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