The Financial Crisis Inquiry Commission held three days of hearings this week to investigate some of the causes behind the financial crisis, grilling former Federal Reserve Chairman Alan Greenspan and various executives.
Greenspan took an historic viewpoint in his prepared testimony. It was the global proliferation of securitized U.S. subprime mortgages that was the immediate trigger of the current crisis, he said. But its roots reach back, as best I can judge, to 1989, when the fall of the Berlin Wall exposed the economic ruin produced by the Soviet system. Central planning, in one form or another, was discredited and widely displaced by competitive markets.
Greenspan was skeptical about preventing future financial crises through legislation. We can legislate prohibitions on the kinds of securitized assets that aggravated the current crisis, he said. But investors have shown no inclination to continue investing in much of the past decades faulty financial innovations, and are unlikely to invest in them in the future. The next pending crisis will no doubt exhibit a plethora of new assets which have unintended toxic characteristics, which no one has heard of before, and which no one can forecast today.
Former Citigroup Chairman Robert Rubin listed a number of different causes behind the crisis, ranging from market excesses to low interest rates to lax and abusive mortgage lending practices and misguided AAA ratings on subprime-mortgage based instruments.
A few key market participants or analysts saw the broad picture and the potential for a mega crisis, said Rubin. A larger number saw one or some of these factors, but no more. Almost all of us involved in the financial system, including financial firms, regulators, rating agencies, analysts and commentators, missed the powerful combination of forces at work and the serious possibility of a major crisis. We all bear responsibility for not recognizing this, and I deeply regret that.
Former Fannie Mae CEO Daniel Mudd tried to explain what happened at the government-sponsored housing lenders. Fannie Mae and Freddie Mac were established as financial institutions, restricted by law to the housing market, and tasked to provide financial liquidity to the housing market even when others chose to retreat, he said. In 2008, the companies had no refuge from the twin shocks of a housing crisis followed by a financial crisis. In hindsight, though, less credit exposure to new homeowners, non-traditional products and regions of the country in economic downturn might have reduced losses.
