Greenspan Imagines Better, Alternate Universe in Which Greenspan Was Not Fed Chair

Alan Greenspan, the policy failure whose tenure at the Federal Reserve helped create the conditions for the largest financial crisis in nearly a century, was inexplicably given a major newspaper platform on Monday to opine about regulation, which he ideologically abhors.

So it came as a surprise to read the second paragraph of his Financial Times op-ed, wishfully describing an alternative history of 2008, if only there had been robust regulation.

“What the 2008 crisis exposed was a fragile underpinning of a highly leveraged financial system,” Greenspan writes. “Had bank capital been adequate and fraud statutes been more vigorously enforced, the crisis would very likely have been a financial episode of only passing consequence.”

Greenspan must have temporarily forgotten that he had the power to accomplish both of these priorities as Fed chair.

Before the Consumer Financial Protection Bureau, the Fed had primary responsibility over consumer protection, including rule-writing, supervision, and prohibition of unfair and deceptive practices. They even were charged with resolving consumer complaints.

Greenspan famously did none of this during the inflating of the housing bubble from 2002 to 2006, instead extolling the virtues of adjustable-rate loans and mortgage securitization, even as fellow Fed governors and the FBI publicly warned about looming fraud. The responsibility for vigorously enforcing fraud statutes, then, fell to Greenspan, and he ignored it.

Greenspan also laments that Wall Street firms carried too much debt before the crisis, and not enough capital. More capital – in the form of stock or cash reserves – would have made sure banks, rather than taxpayers, covered their own losses. But Greenspan could have enacted this at the time, being the head of the most powerful financial regulatory agency from 1987 to 2006.

The entire op-ed, in fact, stresses the need for higher capital requirements — to the extent that Greenspan wants to discard Dodd-Frank entirely once they are reached — while ignoring that, when he was in a position to enforce higher capital requirements for two decades, he took a pass.

In 2004, the Greenspan Fed agreed to allow banks to have a lower capital ratio for mortgages, under international capital rules. The Fed’s rules explicitly stated that mortgages had lower risk, encouraging banks to load up on mortgages and mortgage-backed securities. Banks liked this at the time, because they could earn more profits by borrowing money and increasing leverage. And Greenspan raised no objection.

Analysts and politicians of both parties have argued in favor of higher capital requirements. But only Alan Greenspan had 20 years to actually operationalize such a policy. Greenspan is part of a long line of former public officials who suddenly figure out the one policy that would fix everything right at the moment when they lose their authority to implement it.