The Financial Crisis Inquiry Commission called former chairman of the Federal Reserve Alan Greenspan to testify before it this week.
Greenspan had earlier asked for his report to the Brookings Institute to be included in the findings of the inquiry. In this report, Greenspan admits that under his leadership, the housing sector was not monitored adequately and neither was the banking expansion analyzed with regard to its long term effects on the economy.
The former chairman was expected to admit that the Fed failed to identify risks in the economy, which finally led to the crash. While Greenspan has indeed accepted responsibility for many of the decisions taken by the Fed, he has also maintained that his decisions were correct in the given circumstances about 70% of the time.
He was insistent about the correctness of the low interest rate policy, which was maintained by the Fed throughout the period prior to the crash. Many believe that this policy was largely responsible for the huge mortgage bubble, which burst when the economy failed to sustain it, setting off a domino effect resulting in the crash. However, Greenspan chose to support his low interest rate decision saying that it mitigated the effects of what could have been an even worse recession.
According to Greenspan, the Federal Reserve does not really have substantial regulatory powers and it can only gauge from the sidelines the market growth and the direction that the economy is taking. He reiterated that the Fed has not been invested with enough authority to prevent the occurrence of any such financial disaster and is thus not really to blame for the crash. Critics have slammed the Fed’s failure to tweak interest rates to keep a check on overheating in any segment of the economy – particularly housing and financial services – which influence growth significantly.
Alan Greenspan was the Fed Chairman during the period from 1987 to 2006. He is one of the more well known public figures to be called in by the FCIC to understand the causes that led to the crash.
Citigroup top management, former Federal Reserve employees, bankers, and key figures from the mortgage industry are also on the list of people the commission hopes to meet with. The outcome of the commission, which will be set out in its December report, is expected to outline how such an economic disaster can be averted in future.
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