Alan Greenspan's testimony before the Angelides Commission certainly provided a target-rich environment, as they say in the Pentagon. While there were some memorable moments, however, the Commission essentially missed its target, leaving the American public as undefended from financial depradation and ruin as it was before the hearing began. It was almost anticlimactic when the power failed during the final fifteen minutes of Greenspan's appearance. The light had left the room long before the!--break-->
The morning's takeaway was this: The American people deserve a prosecutor to get to the bottom of this financial mess. They need someone who will hold the Alan Greenspans of the world accountable, someone who'll force them to stop evading questions and avoiding responsibility. This Commission was not prosecutorial today. It was Senatorial - and that's not a compliment.
You know what else would help? A narrative.
The headline-grabber statement was probably Greenspan's comment that "I was right 70% of the time and wrong 30% of the time," which is in his estimation a good performance. Really? That's a D+, or at best a C-. The question should have been asked: Are you really proud of your "D" performance, Mr. Chairman?
The other stunner of a comment was this one: We need financial innovation, said Greenspan, but "all innovation, by its nature, is unforecastable." Greenspan's solution is to increase capital requirements and fix them permanently. In effect, he's claiming that it's always going to be the Wild West. Let the shootouts keep happening, but set aside some money for the coffins.
Here's another outrageous one: People think the Federal Reserve is independent, said Greenspan, but in reality "we are a creature of the Congress." Greenspan argued that politicians told him what to do and he did it. He shouldn't be allowed to make statements like that without serious cross-examination.
The atmosphere in the room before the hearing was slack, almost listless, as if the Commissioners and the attendees knew in advance that nothing decisive was going to happen. And that's a shame because, underneath all the myth-making and legend, Greenspan's performance wasn't that good. His testimony was filled with contradictions, vague assertions,and easily rebuttable statements. Yet there was almost no follow-up, not identification and pursuit of his contradictions or his more wild assertions.
The commission, whose official name is the Financial Crisis Inquiry Commission (or FCIC), was supposedly modeled on the Pecora Commission that investigated the crash of 1929. But that commission's questioning was primarily conducted by a single individual, a former New York assistant district attorney named Ferdinand Pecora. A good prosecutor would have had a field day with Greenspan, and that's exactly what the American public needs.
As predicted, Greenspan filibustered as much as he could. He dodged questions, changed the subject, and rambled until he was either cut off (or not) by his questioner, and deployed rhetorical decoys over and over, from "that's a good question" to "you're not going to get anything done by shuffling chairs." They failed to pin him down, even though he was there to be had.
Here's what Greenspan's saying, and it's as far-fetched as it sounds: The Cold War drove down mortgage rates. Predatory lending and reckless, unregulated speculation had nothing to do with the crisis - it was the Russians. Crises cannot be predicted (although he says a regulator's role is preventive; nobody called him on that contradiction.)We need all these complicated, Rube Goldberg-esque financial products (or gimmicks) because today's "division of labor" is so complicated. (Maybe if we got rid of all those non-productive financial "laborers" it would get simpler.)
Overall, he's saying that the world has become so complicated that regulators can't possibly predict disasters. All we can do is raise enough capital to pay for them. If you buy that, I have a few mortgage-backed securities to sell you.
The other narrative in the room was that of the Republican ideologues on the Commission (you didn't need to know who they were in advance; you could tell as soon as they began speaking). They were pushing the false but easy-to-grasp notion that "Fannie Mae and Freddie Mac and subprimes are to blame." That's a nifty twofer that allows them to simultaneously slam government action and, by implication, lower-income families, and Greenspan played to their narrative, too.
The ones who understand the problem and what needs to be done -- a group that includes Phil Angelides, Heather Murren, and unsung financial hero Brooksley Born -- didn't present a counter-narrative. More importantly, they didn't provide the kind of prosecutorial questioning that would have brought Greenspan's evasive and self-contradictory statements to light.
They tried. Angelides asked some tough questions, but ran out of time. Born pointed out that Greenspan opposed the regulation of of over-the-counter derivatives that have been trading at multi-trillion dollar volumes without any regulations whatsoever -- thanks in large part to Greenspan's resistance to regluation. When she asked Greenspan if these derivatives played any role in the crisis, he essentially refused to answer. "In the beginning," he said, these products "were a very small part of overall volume."
A prosecutor would have stepped in and said "we're not talking about the beginning, we're talking about the last ten to fifteen years." But Greenspan meandered on, talking about the early days and then changing the subject to AIG. "It is correct," he said, that (AIG's) activity in selling CDS was the proximate cause of their collapse. But ... they could just as easily gotten into the same trouble selling insurance instruments."
But, as Born attempted to point out, insurance is regulated. She tried to pin him down on ideology, too,quoting him as saying he is "an outlier in (his) libertarian opposition ... to regulation" and asking him if his influence as a "respected sage" led to too much deregulation. But then she made a mistake a prosecutor wouldn't, mixing one tough question with another: "You've argued that the role of supervision is preventive, but the Federal Reserve failed to prevent the housing bubble, the predatory lending scandal ... failed to prevent banks from becoming too big to fail."
The mixing of questions - probably made necessary by time limits and format - allowed Greenspan to skate away on both points. It's unfair to single out the admirable Ms. Born, whose performance was actually one of the best of the morning. The format itself was a major flaw, with limited questioning from a constantly changing list of inquisitors.
That let Greenspan get away with murder: He would avoid some questions by insisting he doesn't like to "look back," then would avoid others by giving lengthy soliloquies on the days when derivatives were "a nominal 1%" of the market. At times he would defend himself by saying "I warned of the consequences ... in 2004," then say that crises can't be predicted. He would say we understood the problems and issued "guidelines," then argue that we didn't and couldn't have known about the problem until Fannie and Freddie figures were released in December 2009. It would take one good questioner, working for the entire morning, to bring these evasions and inconsistencies to light.
Greenspan placed an inordinate amount of faith in the principles of risk management, and particular in the computing power of Risk Management information systems. But, as one who has worked in that field, it was impossible to forget the old adage: Garbage in, garbage out. During the last few minutes of testimony, when Greenspan's voice became nearly inaudible, it sounded as if the former Fed chair was arguing that regulation didn't fail - risk management did.
But risk management is a private sector function. The topic of the day was the role of regulators in general, and Mr. Greenspan's epic failures in particular. The fact that he was able to close his testimony by (apparently) shifting responsibility back to the very corporations he was supposed to be monitoring tells us everything we need to know. A good prosecutor would have had a follow-up question or two.
Instead, we were left in the dark.
Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at:
Website: Eskow and Associates
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