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Greenspan: U.S. Will Take Months To Recover

MELISSA BLOCK, host:

From NPR News, this is All Things Considered. I'm Melissa Block. Shocked disbelief, that's the state Alan Greenspan says he finds himself in. The man long viewed as an economic guru admitted today that the financial crisis has exposed flaws in his understanding of the economy. Greenspan ran the Federal Reserve for nearly two decades, and today, he was grilled by a House committee on why he hadn't done more to prevent the crisis. NPR's John Ydstie has our story.

JOHN YDSTIE: Today's hearing was clearly not a pleasant experience for Greenspan, who, not so long ago, commanded unparalleled respect and deference on Capitol Hill. This time, congressmen challenged him, goaded him, and interrupted him. This question from Ohio Democrat Dennis Kucinich captures the mood.

Representative DENNIS KUCINICH (Democrat, Ohio): You know, when did you know there was a housing bubble, and when did you tell the public about it?

Mr. ALAN GREENSPAN (Former Chairman, Federal Reserve): Let me just go...

Representative KUCINICH: Will you answer the question?

Unidentified Woman: The gentleman's time has expired. Mr. Greenspan can answer, but your time has expired.

Representative KUCINICH: When did he tell the public about it?

YDSTIE: Greenspan did finally get a chance to respond to the question. The former Fed chairman said the housing bubble became clear to him in early 2006. But he admitted, he didn't anticipate how much home prices would fall.

Mr. GREENSPAN: I did not forecast the significant decline because we had never had a significant decline in prices.

YDSTIE: The House Oversight Committee's chairman, Henry Waxman, a California Democrat, grilled Greenspan on why he ignored a warning in the year 2000 from Federal Reserve Governor Ned Gramlich about the dangers of subprime mortgages.

Representative HENRY WAXMAN (Democrat, California): He urged you to move with the power that you had as the chairman of the Fed, that you put in place regulations that would have curbed these emerging abuses in subprime lending, but you didn't listen to Mr. Gramlich. Do you think that was a mistake on your part?

Mr. GREENSPAN: Well, I question the facts of that. He and I had a conversation. I said to him I have my doubts as to whether it would be successful.

YDSTIE: At one point, the back and forth during the hearing went beyond specifics and became philosophical and happened when Waxman challenged Greenspan over his support of unfettered free markets, and his belief that, quote, "we've tried regulation and none meaningfully worked."

Representative WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made?

Mr. GREENSPAN: Well, remember that what an ideology is is a conceptual framework with the way people deal with reality. Everyone has one. To exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw in the model that I perceived is a critical functioning structure that defines how the world works, so to speak. I was shocked because I've been going for 40 years or more with very considerable evidence that it was working exceptionally well.

YDSTIE: The basic flaw in his theory, said Greenspan, was his view that financial institutions can be relied on to operate in their own self interest. That, he thought, would provide sufficient protection for shareholders. It turned out not to be true. Greenspan, who has argued that derivatives provide an important contribution to the economy, admitted that the ones at the core of the current financial crisis, credit default swaps, should be regulated. The former Fed chairman said this crisis is a once-in-a-century tsunami. He said, given the financial damage to date, he can't see how significant rises in layoffs and unemployment can be avoided. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.