Greenspan takes one on the chin, admits flaws in system

WASHINGTON -- The Oracle was blindsided.

Former Federal Reserve chairman Alan Greenspan told angry lawmakers Thursday he was "shocked" to discover — as a once-in-a-century financial crisis spread — that his bedrock belief that financial firms could police themselves turned out to be "flawed."

"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity," Greenspan, described as a maestro and an oracle while at the central bank, told a House committee. Greenspan called that "a flaw in the model ... that defines how the world works."

He said the nation faces a "once-in-a century credit tsunami."

Greenspan, who left the Fed in 2006, spent much of the hearing pushing back against lawmakers who said he did not do enough to protect consumers at the Fed.

"You had the authority to prevent irresponsible lending … and now our whole economy is paying its price," said Rep. Henry Waxman, D-Calif.

Waxman asked Greenspan if his free-market ideology "pushed you to make decisions that you wish you had not made." Greenspan, for example, opposed efforts to regulate derivatives: financial products whose value depends on the movement of other assets like commodities or stock indexes.

Greenspan said many parts of the derivatives market are performing well. He said it was difficult for Fed officials, who oversee just one slice of the U.S. banking industry, to gauge the breadth of problems in the mortgage market.

Greenspan and former Treasury secretary John Snow said they pushed Congress unsuccessfully to tighten rules for mortgage giants Fannie Mae and Freddie Mac. The government took over the firms last month.

"I feel like I'm looking out there at three Bill Buckners," Rep. John Yarmuth, D-Ky., told Greenspan, Snow and Securities and Exchange Commission Chair Chris Cox, who also testified. Buckner was a Boston Red Sox player who made a critical error in a 1986 World Series game.