Wednesday, April 7, 2010

Thanks to Greenspan and Bernanke, The Next Crisis Could Be "Even Scarier"

Alan Greenspan is on Capitol Hill today testifying in front of the Financial Crisis Inquiry Commission. The former Federal Reserve Chairman Alan Greenspan has come under increased scrutiny for his failure to anticipate the housing bubble. Roger Lowenstein, author of The End of Wall Street, says the criticism is deserved.

In Lowenstein’s view Greenspan made several key mistakes.

-- Too Low for Too Long: "He never said 'gee maybe we shouldn’t have left rates at 1% three years into a recovery' when housing is rising at double digit rates."

-- Missed the Bubble: "This idea that you should prick a bubble before it gets too big just totally ran against his grain."

-- The Market is Always Right: The root of the problem is that Greenspan "believed deeply in the philosophy that if markets do it, it's right," Lowenstein says. Current Federal Reserve Chair Ben Bernanke deserves some blame for continuing Greenspan’s policies, he says. "Ben Bernanke is absolutely Greenspan light."

What's even more troubling is that the solution to the crisis, engineered by Washington, may be even more catastrophic, Lowenstein says. "What the government may have done is not solve the Wall Street crisis but may have just assumed Wall Street's debt."

Which brings up the real possibility "the next [crisis] could be centered right in Washington [and] could be even scarier," Lowenstein warns.