On Thursday, almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.

Now 82, Mr. Greenspan came in for one of the harshest grillings of his life, as Democratic lawmakers asked him time and again whether he had been wrong, why he had been wrong and whether he was sorry.

Critics, including many economists, now blame the former Fed chairman for the financial crisis that is tipping the economy into a potentially deep recession. Mr. Greenspan’s critics say that he encouraged the bubble in housing prices by keeping interest rates too low for too long and that he failed to rein in the explosive growth of risky and often fraudulent mortgage lending.

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

On a day that brought more bad news about rising home foreclosures and slumping employment, Mr. Greenspan refused to accept blame for the crisis but acknowledged that his belief in deregulation had been shaken.

He noted that the immense and largely unregulated business of spreading financial risk widely, through the use of exotic financial instruments called derivatives, had gotten out of control and had added to the havoc of today’s crisis. As far back as 1994, Mr. Greenspan staunchly and successfully opposed tougher regulation on derivatives.

But on Thursday, he agreed that the multitrillion-dollar market for credit default swaps, instruments originally created to insure bond investors against the risk of default, needed to be restrained.

“This modern risk-management paradigm held sway for decades,” he said. “The whole intellectual edifice, however, collapsed in the summer of last year.”

Mr. Waxman noted that the Fed chairman had been one of the nation’s leading voices for deregulation, displaying past statements in which Mr. Greenspan had argued that government regulators were no better than markets at imposing discipline.

“Were you wrong?” Mr. Waxman asked.

“Partially,” the former Fed chairman reluctantly answered, before trying to parse his concession as thinly as possible.

Mr. Greenspan, celebrated as the “Maestro” in a book about him by Bob Woodward, presided over the Fed for 18 years before he stepped down in January 2006. He steered the economy through one of the longest booms in history, while also presiding over a period of declining inflation.

But as the Fed slashed interest rates to nearly record lows from 2001 until mid-2004, housing prices climbed far faster than inflation or household income year after year. By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust.

Mr. Greenspan brushed aside worries about a potential bubble, arguing that housing prices had never endured a nationwide decline and that a bust was highly unlikely.

Mr. Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford.

The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act . But it took little action during the long housing boom, and fewer than 1 percent of all mortgages were subjected to restrictions under that law.

This year, the Fed greatly tightened its restrictions. But by that time, the subprime market as well as the market for other kinds of exotic mortgages had already been wiped out.

Mr. Greenspan said that he had publicly warned about the “underpricing of risk” in 2005 but that he had never expected the crisis that began to sweep the entire financial system in 2007.

“This crisis,” he told lawmakers, “has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount.”

Many Republican lawmakers on the oversight committee tried to blame the mortgage meltdown on the unchecked growth of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were placed in a government conservatorship last month. Republicans have argued that Democratic lawmakers blocked measures to reform the companies.

But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”

“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower,” he said.

commentary

Its the same old Republican line here- get govt out of the way, let the MARKET decide, etc. Well with deregulation we tried that approach and look where it got us. The proof is in the pudding. Deregulation DIDNT work. The crooks and greedy bankers took everything they could steal. These LESS government people must believe we dont need Social Security, or Medicare, Customs, or the FBI, or the military, or the EPA, etc etc-any government or regulation is BAD government. BS. Letting those in the market do as they wish has gotten us into a worldwide crisis, the likes of which we havent seen since the Depression. Is there anyone who is saying that deregulation has been a GOOD thing for anybody but the crooks and thieves? If so, please explain. I would be interested in hearing THAT explanation.

campaign pros and cons

Apparently Palin DID fight corruption among the oil companies in Alaska and that is to her credit. That she also apparently had a trooper fired for divorcing her sister is NOT to her credit, and smacks of petty politics. She does appear to know something about energy from her experience in Alaska, but cannot see Russia from her house, as she claimed, and has NO foreign affairs experience, so she is limited to that one issue. I salute her as a woman seeking high office but thats not enough to lead our country. Getting elected to the US Senate is an accomplishment, no? He has managed to raise over 100 million dollars for his campaign and that is no small accomplishment. Obama has authored or partnered on several bills in his time in the Senate. We cant afford another term of the same policies as Bush. Bush's approval rating is around 26 % as of this time. the Republicans claim that the Democrats have caused all this in the last six months, even while deriding the Democrats for "doing nothing". How can THAT be? Either they did nothing or they caused a lot of problems, no? Thay CANT have done both. Are the Republicans suggesting that the Democrats are responsible for the subprime mess? Who is the deregulation at all costs party? Who says,"Let the market decide", and after they have run us into the ground with their unsupervised greed and corruption, wants the TAXPAYERS (government) to bail their sorry butts out?

setting the record straight

McCain: But you know, one of the real catalysts, really the match that lit this fire was Fannie Mae and Freddie Mac. [T]hey're the ones that, with the encouragement of Sen. Obama and his cronies and his friends in Washington, that went out and made all these risky loans, gave them to people that could never afford to pay back. Obama blamed deregulation of the banking industry: Obama: Now, I've got to correct a little bit of Sen. McCain's history, not surprisingly. Let's, first of all, understand that the biggest problem in this whole process was the deregulation of the financial system.
We've been here before. McCain has in fact been in favor of financial deregulation, but President Bill Clinton signed, and a lot of other Democrats supported, much of that same deregulation. And while Democrats really did fight McCain-cosponsored regulations of the FMs, McCain himself signed on to the bill just two months before the housing bubble popped.In fact, there's plenty of blame to go around. Experts have blamed everyone from home buyers to mortgage lenders to Alan Greenspan to both the Bush and Clinton administrations. Furthermore, McCain misspoke when he said Fannie Mae and Freddie Mac "made all these risky loans, gave them to people that could never afford to pay back." Actually those organizations did not make "home loans directly with consumers." Rather, they "work[ed] with mortgage bankers, brokers, and other primary mortgage market partners" and supplied them with the funds to lend to home buyers at affordable rates, as described on their Web sites. Sounds like there is PLENTY of blame to go around.

hypocrisy on the hoof

I couldnt agree more that its not fair that Joe Sixpack has to bail out those greedy and crooked SOBs. It is also true that Fannie Mae and Freddy Mac contributed to the problem. I dont think either party has the greed and criminal market cornered. I blame the Republicans, starting with Phil Graham in 1999, for the deregulation process that eliminated the oversight functions and allowed the crooks and greedy predators to proliferate, manipulate, and steal at will. If not for deregulation there would have been regulations and oversight for Wall Street and Freddy and Fannie. Penalize and imprison those crooks and greedy SOBs? YES. The Republicans want NO government interference or oversight UNTIL they run our economy into the ground. THEN they want the GOVERNMENT to bail their greedy and crooked butts out! Talk about hypocrites!