In a House Oversight Committee hearing today, former Fed Chairman Alan Greenspan claimed the credit crisis is a “once in a century credit tsunami” that policy makers did not anticipate. Greenspan repeatedly distanced himself from the financial meltdown, however, saying he didn’t foresee the crisis because of a “flaw in the model.”
Greenspan claimed he was “shocked” because his model “was working exceptionally well” for 40 years, adding that the crisis is “broader than anything I could have imagined”:
GREENSPAN: I also want to discuss how my thinking has evolved and what I have learned this past year. In 2005, I raised concerns that the protracted period of the underpricing of risk if history was any guide would have dire consequences. The crisis, however, has turned out to be much broader than anything I could have imagined.
Bush administration officials seem to have a systemic lack of imagination, often claiming major — and predictable — crises simply caught them off guard:
–9/11: “And I said, ‘No one could have imagined them taking a plane, slamming it into the Pentagon’ — I’m paraphrasing now — ‘into the World Trade Center, using planes as a missile.’” – Condoleezza Rice, to 9/11 Commission
– Hurricane Katrina: “The destruction left by Katrina reaches beyond anything we could have imagined.” — Bush, 5/11/06
In December, Edward M. Gramlich, a former Federal Reserve governor, told the New York Times that he “privately urged Fed examiners to investigate mortgage lenders affiliated with national banks,” but “he was rebuffed by Alan Greenspan.” In his recent memoir, Greenspan wrote:
I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk. … But I believed then, as now, that the benefits of broadened home ownership are worth the risk.
It seems Greenspan was so willing to accommodate Bush’s ownership society that he refused to take into account the economic risk of subprime borrowing.