It's not my fault.
That was the message Federal Reserve Chair Alan Greenspan brought to the Financial Crisis Inquiry Commission
this morning. He didn't budge from that script even as commission chair Phil Angelides, former Treasurer of California, pushed back with evidence that Greenspan – under oath – wasn't telling the whole truth.
As Greenspan tells it, risky subprime lending boomed in the 2000s as money flooded in from investors, biggest among them Fannie Mae and Freddie Mac. Fannie and Freddie operated under mandates from Congress and the U.S. Department of Housing and Urban Development to back mortgages made to low- and moderate-income borrowers, and fulfilled them largely by buying subprime securities issued by Wall Street. Then investors from around the world piled on.
So where was the Fed while this was going on? Did it try to slow down subprime lending before the bubble burst?
Greenspan told two different versions of this story, both professing the Fed's innocence. Unfortunately, neither one gets Greenspan off the hook for the Fed's failures to act.
First story: "We did" act to put the brakes on subprime lending. The Fed published "guidance" on subprime lending in the 1990s, Greenspan said. Guidance is a kind of message to banks about how they ought to act, but it's not enforceable by regulators. Then the Fed put out rules for the enforcement of the Home Owners' Equity Protection Act (HOEPA), a 1994 law that was supposed to rein in subprime lending, and that required the Fed to create these rules.
Angelides tore that one apart: The Fed's HOEPA rules were supposed to apply to 38 percent of subprime loans. They ended up covering just 1 percent.
Second story: We couldn't do anything to put the brakes on subprime lending, Greenspan claimed, because the whole world was in love with expanding homeownership and all the wonderful benefits it seemed to bring to the economy. "If the Fed as a regulator tried to thwart what everyone believed was the right direction, an unmitigated good, Congress would have clamped down on this. The perception is that the Federal Reserve is an independent agency, but the Fed is a creature of the Congress. During the expansion of the subprime market, if a few said we're in a bubble and have to retrench, Congress would have said, 'We have no clue what you are talking about.' "
Isn't it the Fed's role, as a safety and soundness regulator – and about as independent from Congress as a government entity in Washington is going to get – to stand up to the politicians and say what it true, right and necessary for consumers and the stability of the American economy? Was Greenspan really worried that Congress would not reappoint him?
So we've learned something new today: Not only did the Fed fail to act as the subprime bubble inflated. It failed to act because Alan Greenspan wanted to please the politicians in charge, rather than do his job.