Greenspan takes on critics

Former Fed Chairman Alan Greenspan said his agency lacked authority to regulate many lenders that issued subprime mortgages.

WASHINGTON -- Alan Greenspan defended his tenure Wednesday as head of the Federal Reserve before a panel investigating the roots of the financial crisis. As he has in the past, Greenspan disputed critics who say he kept interest rates too low for too long, encouraging risky lending.

Greenspan also hit back against criticism that his Fed failed to regulate high-risk loans to borrowers who couldn't afford the debt. Many of those loans became the toxic assets that sparked the crisis.

Testifying to the Financial Crisis Inquiry Commission, Greenspan insisted that the Fed lacked authority to regulate the nonbank lenders that issued most subprime mortgages.

Phil Angelides, the panel chairman, referred to internal Fed documents in which staffers had recommended "broad prohibitions on deceptive lending." Angelides said the Fed had issued guidance on predatory lending but had failed to regulate it.

"Why, in the face of all that, did you not act to contain abusive, deceptive subprime lending?" Angelides, a former California state treasurer, asked Greenspan.

Greenspan pointed to a series of actions he said the Fed took. Angelides countered that the Fed's actions covered only 1 percent of the subprime lending market.

"You could've, you should've and you didn't" regulate the lending activities, he said.

In his opening remarks, Greenspan blamed a litany of other parties and historical events for the meltdown, but accepted no responsibility for himself or the Fed, which he led from 1987 until early 2006.

He said excess saving in developing nations left too much money in the system. And he said credit rating agencies undercounted the risk of mortgage investments.

Greenspan said demand from the government-backed mortgage giants Fannie Mae and Freddie Mac inflated the housing bubble.

He said the government policy of encouraging homeownership pushed Fannie and Freddie to create demand for risky loans.

Those firms play a vital role in the mortgage market by buying up mortgage loans and packaging them into bonds that are resold to global investors.

Mark Zandi, chief economist at Moody's Analytics, said the Greenspan Fed's decision not to set national mortgage lending standards was a key factor in the housing bubble, far more so than Fannie and Freddie.

Zandi noted that countries such as Canada and Germany, with tighter regulations, largely avoided the bust, while countries that followed the U.S. model of light regulation fell into crisis.

Zandi also rebutted Greenspan's argument that his Fed's low-interest-rate policy played no role.

"The aggressive monetary policy in the wake of the tech bubble contributed to the inflating of the housing bubble," Zandi said.

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