by Deb Cupples | Yesterday, former Federal Reserve Chairman Alan Greenspan testified before the House Oversight Committee about government regulation (or the lack thereof) and its role in our nation's current financial crises.
The New York Times reports:
"[O]n 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.
â'Those of us who have looked to the self-interest of lending institutions to protect shareholdersâ equity, myself included, are in a state of shocked disbelief,' he told the House Committee on Oversight and Government Reform. (NYT)
Lending institutions' self-interest was supposed to protect shareholders? Apparently, Mr. Greenspan hadn't grasped these simple facts:
1) Lending institutions don't make decisions -- the people running them do; and
2) The self-interest of the people running lending institutions often clashes with the interest of shareholders.
I think it's safe to say, that corporate executives (whether working for lending institutions or other companies) tend to make big bonuses when their company stock prices go up and/or when the companies appear to do well.
Thus, one unfortunate incentive is for corporate execs to pump stock prices and net-income figures -- even if the pumped figures aren't real -- e.g., when execs insisted on spending shareholder dollars on obviously over-valued mortgage-backed securities.
If most big lending institutions (and other Wall Street firms) were doing that -- and apparently they were, because government regulations didn't curb such behavior -- then how could anything but a large-scale meltdown occur?
For those who are fuzzy about Mr. Greenspan's role in the housing bubble and current mortgage crisis, the New York Times summarizes:
"[A]s 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.
"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 [which Greenspan headed] 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."
As usual, Republican members of the House Oversight Committee sent their logic into gymnastic-like fits, trying to blame anything but de-regulation for our current financial woes:
"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."
Yes, some Democratic lawmakers did argue against reducing the number of mortgages that Fannie and Freddie bought.
Remember this fact of recent history: Republicans controlled the U.S. House, the U.S. Senate, and the White House from 2003 through 2006. Exercising said control, Republicans made terrible messes of our bankruptcy and tax laws during those years -- despite protests from Dems.
If Republicans had truly wanted to reform Fannie and Freddie, they could have. If Republicans had truly wanted to sensibly regulate lending practices and "exotic" securities, they could have.
The fact is that the Republicans did not do those things. Now, some of the same Republicans are scrambling to blame anyone but themselves for the mammoth messes that our nation now faces -- and they're counting on us ordinary folks to forget that said Republicans controlled Congress and the White House during the years that the foundation of our current crises was being laid.
If you're interested in yesterday's House Oversight Committee hearing, you'll find links to a video of testimony, an overview, and Henry Waxman's opening statement here.
Memeorandum has commentary.
Other Buck Naked Politics Posts:
* Lehman Execs Re-Distributed Shareholder Wealth (to Themselves)
* AIG Execs Re-Distributed Shareholder Wealth (to Themselves)
* Fannie CEO Got $38 Million, Risky Buys Weren't his Fault?
* Execs Took Millions While Driving Companies into Ditch
* AIG's $85 Billion Bailout: see What Anti-Regulation Ideology can do?
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