Greenspan Defends His “The Crisis” Policies

Alan Greenspan has come out with a 48-page report, named “The Crisis”, in which he has defended the low interest policies of the Fed when he was at its helm. Greenspan, who was speaking at the Brookings Institution conference in Washington, said that it was not the policies of the Fed but a failure to assess systemic risk and predict the huge financial crisis that caused the economic tsunami of 2008.

Greenspan has come under heavy criticism from all quarters ever since the financial crisis unfolded. It has been claimed that it was his policies that led to the housing bubble. Greenspan had been a strong advocate of low interest rates and easy money availability, and these factors have been blamed for aggressive lending by banks to subprime consumers.

The former Fed chairman, who was behind all the major decisions of the bank from 1987 to 2006, said that the problem lied in the lack of experience of regulators in dealing with large financial crisis. He said that most of the regulators had only dealt with mild recessions and they had no idea of how to identify or prevent a crisis of the scale of 2008.

He also said there were clear shortcomings in the way systemic risk was assessed by the regulators. Greenspan did acknowledge that a lot of the blame for this lied with the Fed, but he didn’t say that it was his own leadership that was to blame.

Greenspan has recommended that banks should be asked to increase their capital from 10% of assets to 14% of assets. However, he warned that lawmakers would find it hard to pass a legislation that would be effective in preventing another major Wall Street related crisis. He would soon be called to the Financial Crisis Inquiry Commission as the Congress continues its investigation into how the country came so close to an economic disaster and how to prevent such situations in future.

Since the near collapse of the financial system, Greenspan’s reputation has been tarnished severely. Earlier considered as one the most intellectual and influential economists in the country, he is now seen by many as an irresponsible regulator whose policies led to creation of serious bubbles. His period as the Fed chairman, which was earlier seen as a successful one with strong growth, is now seen as nothing more than a precursor to the deepest and the most damaging recession since the Great Depression of the 1930s.

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