Greenspan: Fed policy not to blame for crisis -Greenspan, others getting questioned about roots of financial crisis
Greenspan said demand from the government-backed mortgage giants Fannie Mae and Freddie Mac inflated the housing bubble. He said the government policy of encouraging homeownership pushed Fannie and Freddie to create demand for risky loans. Those firms play a vital role in the mortgage market by buying up mortgage loans and packaging them into bonds that are resold to global investors.The Myth of Fannie Mae, Freddie Mac, Barney Frank, the Housing Bubble and the Recession
But Mark Zandi, chief economist at Moody's Analytics, said the Greenspan Fed's decision not to set national mortgage lending standards was a key factor in the housing bubble — far more so than Fannie and Freddie.
Zandi noted that countries like Canada and Germany with tighter regulations largely avoided the bust, while countries that followed the U.S. model of light regulation fell into crisis.
"The Federal Reserve had that authority," Zandi said in an interview. "They just never acted on it. That was a clear policy decision."
Zandi also rebutted Greenspan's argument that his Fed's low-interest-rate policy played no role.
"The aggressive monetary policy in the wake of the tech bubble contributed to the inflating of the housing bubble," Zandi said. "There's strong evidence that the Federal Reserve kept interest rates too low for too long."
Regarding his own missteps over his two decades as Fed chair, Greenspan said, "I was wrong 30 percent of the time, and there were an awful lot of mistakes in 21 years."
He would not cite any specific failures, except banks' and regulators' collective failure to anticipate that so many challenges would hit the financial system at once.
Greenspan said future credit crises will be prevented only if banks:
* Are required to hold more capital as a buffer against future loan losses
* Are forced to keep more cash-like assets instead of investments that can be hard to sell
* Are required to hold more collateral to protect against default by other financial companies.
The 10 bipartisan commissioners later will grill former and current executives of Citigroup Inc. about that bank's role in financing and reselling mortgage investments.
Greenspan's appearance opened three days of hearings by the FCIC. The hearings are focused on high-risk mortgage lending and the way trillions of dollars in risky mortgage debt was spread through the financial system. They are designed to provide a firsthand accounting of decisions that inflated a mortgage bubble and triggered the financial crisis.
The panel is using Citigroup as a case study because the bank was heavily involved in every stage of that process. The megabank was a major subprime lender through its subsidiary CitiFinancial. Other divisions of Citigroup pooled those loans and loans purchased from other mortgage companies and sold the income streams to investors.
As borrowers defaulted, Citigroup took losses on mortgage-related investments it held on and off its books. Mortgage troubles at Citi, defunct investment bank Bear Stearns and elsewhere exposed cracks in the financial system. In late 2007 and throughout 2008, those fissures grew into a full-fledged credit crisis that crippled the global economy.
The FCIC aims to dissect the bank's structure and show how its functions interacted. Wednesday's witness list includes current and former executives from CitiMortgage, parent company Citigroup Inc., and the division of Citi Markets & Banking that created the most notorious mortgage-backed investments.
Global Housing Boom
Pray tell what caused the same boom and bust in these other nations?Chart of world wide housing bubble at link.
And how could Fannie/Freddie or the CRA be responsible — that only applies to the US — when you have the same, global, coordinated rise in prices? (And you can add Korea and New Zealand to the chart above).
For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?
And if you can’t answer that, then what hope do we have that you will offer up empirical evidence that Fannie/Freddie/CRA caused this in light of the above?
Private sector loans, not Fannie or Freddie, triggered crisis
