Greenspan Admits That He Too Partially Missed the Boat

As reported by Bloomberg: Greenspan Concedes to 'Flaw' in His Market Ideology:

"Former Federal Reserve Chairman Alan Greenspan said a 'once-in-a-century credit tsunami' has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

'Yes, I found a flaw,' Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. 'That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.'

Greenspan said he was 'partially' wrong in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholders and investments as well as he expected.

'We cannot expect perfection in any area where forecasting is required,' he said. 'We have to do our best but not expect infallibility or omniscience.'

Part of the problem was that the Fed's ability to forecast the economy's trajectory is an inexact science, he said.

'If we are right 60 percent of the time in forecasting, we are doing exceptionally well; that means we are wrong 40 percent of the time,' Greenspan said. 'Forecasting never gets to the point where it is 100 percent accurate.'"

What happened?

"Today, the former Fed chairman asked: 'What went wrong with global economic policies that had worked so effectively for nearly four decades?'

Greenspan reiterated his 'shocked disbelief' that financial companies failed to execute sufficient 'surveillance' on their trading counterparties to prevent surging losses. The 'breakdown' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

'As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,' Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say."

It's a bit disconcerting that so many of our leading economists comment that they didn't see this economic crisis coming. In hindsight, the signs are quite clear. Many will argue that the signs were there and quite clear all along. Nonetheless, easy money, the lack of basic regulations, and greed made for a bad cocktail. Still dazed and confused, the hangover continues.