The Blame Game

Alan Greenspan returned to Washington on Thursday to a much less cordial atmosphere than he was accustomed to. An objective observer of yesterday’s congressional hearing might have noted that it was more reminiscent of the accusatory, blame game format from the Robert Clemens steroid hearings than one of Mr. Greenspan’s past visits. He used to walk through the Congressional hallways with an air of cool composure and was greeted with a venerable deference that few others could claim to possess.

But things are different these days. Now we are in the midst of a financial collapse and elected officials need to do what elected officials tend to do when there are problems: they need to find a scapegoat.

Watching yesterday’s hearing, I saw a man who had made an error in judgment. An error that cost a lot of people a lot of money. Greenspan was as adamant a proponent of deregulation as anyone involved in United States economic policy. His basic theory was that self-preservation would lead free markets to maintain reasonable levels of risk and to avoid taking actions that might lead them to financial ruin. So, he argued, the government did not need to enforce stricter regulations on subprime mortgages and other highly sophisticated lending vehicles. In retrospect, this idea of self-regulation clearly proved itself to be insufficient.

Greenspan was also wrong in other core assumptions. For example, he repeatedly dismissed fears about an imminent housing bubble. Under his guidance, the Fed maintained historically low interest rates and pursued policies that drove home prices up at rates disproportional to the growth of wages. Greenspan also not only condoned aggressive lending practices, but he seemed at times to encourage it. Under the assumption that home prices would continue to incrementally increase well into the future, he was a fervent believer in promoting home ownership for individuals, even if that meant they assumed loans that seemed somewhat unaffordable (the idea being that the increase in property value would offset the rising mortgage costs).

Clearly, Greenspan was wrong in a good deal of his assumptions relating to the housing sector and to the idea of deregulation. And the thing is, he would be the first person to tell you that. In yesterday’s hearing Greenspan stated that, “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity, myself included, are in a state of shocked disbelief”.

The problem is, Greenspan isn’t the only person in this situation who is responsible for the mess that were in.

The other thing that I saw yesterday was a room full of politicians who seemed entirely more concerned with allocating blame away from themselves than with engaging in an honest discussion about how to fix the problem. Democrats wanted Greenspan to pin himself to the stake and confess the deep, dark, evil truths about how deregulation had led to corrupt business practices. And, you know what, that’s true. Greenspan could and should have led the Federal Reserve to exert more influence on the practices of the financial sector through using the powers provided to it by the 1994 Home Owner Equity Protection Act. Instead, he didn’t and the private sector ran wild.

Republicans wanted to talk exclusively about Fannie Mae and Freddie Mac. They wanted Greenspan to point the finger at Democrats for a lack of oversight over both institutions, and for their roles in promoting increased homeownership among the middle class, even though that meant the securitizing of mortgages that people largely couldn’t afford. And, again, that’s true. Democrats did push for increased homeownership despite the obvious risks associated with such an agenda, and a lack of oversight did likely contribute to the need to now bring both Freddie and Fannie under direct governmental ownership through a conservatorship.

Democrats wanted to brand corporations and other lenders as villains for marketing predatory loans to consumers unable to pay them. And they also wanted to openly criticize Wall Street for promoting a culture of outrageous executive compensation that places the interests of the wealthy above the interests of main-street. Again, they are correct. Lenders should never have marketed these predatory loans, and they are significantly to blame for the resulting fall out from them. And, you know what, the culture of executive pay on Wall Street is wrong. A CEO of an S&P 500 company makes, on average, $14.2 million annually, while thousands of Americans are losing their jobs every day it seems.

Republicans wanted to blame homeowners who knowingly entered into mortgages that they very well understood they couldn’t afford. And that’s right also. People should live within their means and be held responsible to a certain extent when they make poor decisions that eventually don’t work out.

See, that’s the problem here. There is blame to go around, and so in the search of scapegoats we find more than enough suitable targets. But no single source accounts for the entire end result. Like the global community in which we live, each person’s actions are interconnected and interdependent. Each of the above problems account for real factors, but they likely could not have occurred independent of everything else.

Furthermore, while identifying the source of a problem is an important element of fixing it, it can’t be the final aim of the process. In such a hyper-political environment, I fear that our sole aim has devolved into assigning blame to “the other side”. But we focus far too little attention on developing solutions, and we display far too little understanding of the fact that, in a time of crisis, none of us are on different sides; we are as interconnected as the system of failures that brought us to this point.

And so, what I saw yesterday was a congressional hearing that seemed to still not understand how to move beyond the past. I saw a former chairman of the Federal Reserve who made an error in judgment, and who was a significant part of the problem, but who cannot be blamed for everything. And, in any case, where would such blame really get us?