Former Federal Reserve chairman Alan Greenspan has admitted an era of laid-back regulation contributed to the recent "once-in-a century credit tsunami".
Speaking to US Congress yesterday, the man who spent 18 years at the helm of US monetary policy conceded he was "partially” wrong in not regulating certain securities – such as credit default swaps.
Greenspan says although he had concerns over the under-pricing of risk in 2005, the current crisis turned out to be much broader than he could have imagined.
“As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself especially are in a state of shocked disbelief,” he says.
“Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined.”
Greenspan expects additional regulatory scrutiny – especially in the areas of fraud, settlement, and securitization.
“It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he says.
“Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.
“The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago. Investors, chastened, will be exceptionally cautious.”
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