That was quite a change of heart the other day from Alan Greenspan, the man many people blame for the global financial mess. Greenspan, the former chairman of the Federal Reserve, admitted in an appearance on Capitol Hill he had "found a flaw" in the free-market ideology he has espoused for his entire adult life.
At 82, he has looked on in "a state of shocked disbelief" as a crumbling financial system sucked up trillions of dollars in public money. Greenspan went from irrational exuberance for free markets to shock and awe at the damage they can wreak. Unfortunately for us, he walked a long way on the road to Damascus before he came to this conversion.
During his 18-year tenure at the Fed, he staunchly opposed regulation of derivatives that later became massively destructive. He fueled a credit bubble with dirt-cheap interest rates and refused to heed warnings to rein in a mortgage industry gone wild. The financial engineers, unfettered by regulation, disguised and diffused risk throughout the world. It emerged suddenly as a monster ravaging equity markets and throwing the world into recession of unknown depth and duration.
In explaining the mistakes the Fed had made in failing to head off the disaster, Greenspan admitted to another crisis of faith. He blamed the crisis on a failure of forecasting and risk models – quite an admission from a consummate technocrat.
Packaging mortgages into securities and selling them to investors around the world created so complex a situation that even the best economists in the world couldn't grasp the risk and anticipate the eventual consequences, he said. In an absurd understatement, he observed that forecasting "never gets to the point where it's 100 per cent accurate."