Page last updated at 16:29 GMT, Wednesday, 7 April 2010 17:29 UK

Alan Greenspan defends role in banking crisis

Alan Greenspan
Alan Greenspan was governor of the Federal Reserve for 19 years

Former Federal Reserve governor Alan Greenspan has defended his record at a congressional hearing into the financial crisis.

In a statement, Mr Greenspan denied that his policy of keeping interest rates low had helped cause the crisis.

Low interest rates have been blamed for the expansion in the sub-prime mortgage market which led to the credit crunch.

However, Mr Greenspan said that the repackaging of those loans by banks was a contributing factor.

Too much debt

"It was the global proliferation of securitised US sub-prime mortgages that was the immediate trigger of the current crisis," he said in a written statement submitted to the Financial Crisis Inquiry Commission (FCIC).

Did we make mistakes? Of course we made mistakes
Alan Greenspan

"By the first quarter of 2007, virtually all sub-prime originations were being securitised, and sub-prime mortgage securities outstanding totalled more than $900bn."

During the hearing, Mr Greenspan was asked why he did not regulate sub-prime lending to prevent people from taking out loans they could ill afford.

He countered that the Fed did not have the authority to do so.

Commission members were unimpressed, with chairman Phil Angelides dismissing Mr Greenspan's defence: "You could've, you should've and you didn't [regulate lending]."

Low rates

Mr Greenspan also argued that the interest rates set by the central bank in fact had little impact on the price of sub-prime loans.

"The house price bubble, the most prominent global bubble in generations, was caused by lower interest rates but... it was long-term mortgage rates that galvanised prices, not the overnight rates of central banks, " he said.

But Mark Zandi, chief economist at Moody's Analytics, told the hearing that "aggressive monetary policy in the wake of the technology bubble [that burst in 2000] contributed to the inflating of the housing bubble".

"There's strong evidence that the Federal Reserve kept interest rates too low for too long," he added.

Mr Greenspan did, however, admit mistakes had been made during his 19-year tenure at the Fed.

"Did we make mistakes? Of course we made mistakes," he said.

"Managers of financial institutions, along with regulators, including but not limited to the Federal Reserve, failed to comprehend the underlying size, length and potential impact [of market risks]."

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