Much blame for the current financial meltdown has been laid at Alan Greenspan?s door while he was Governor of the Fed for almost two decades until a couple of years ago. So, his appearance before the US Congress in a public testimony was much anticipated. His testimony, an extract from which is our second column today, may have brought joy to his critics as he admitted errors of judgment on his part which may have contributed to the financial trouble. Most pointedly, he admitted to have failed in making the assumption that banks and financial institutions would always act in the best interests of themselves and their equity holders?perhaps a cornerstone of free market capitalism. The rest of his testimony, bleak as it was about the prospects for the US economy could have hardly brought joy to anyone. He importantly suggested that US housing prices are still many months from recovering, which could be a prolonged period of stress for subprime mortgages and other toxic assets. He also suggested that the US financial system may become over-cautious, with or without regulation, in response to the crisis, which Greenspan termed a once-in-a -century tsunami. That?s an important point to note as the world reviles aggressive banking now.
The Greenspan testimony also highlights the great strength of the US political system?something we in India would do well to learn from. The US Congress has the authority to summon key public policy officials including central bank governors and regulators?both serving and those who have now retired?to explain their decisions and actions. An ex-chairman of SEC was also summoned in addition to Greenspan. In India, the governors of RBI and key regulators cannot be made to depose in public before Parliament. Perhaps this wasn?t necessary in our old socialist economy but it becomes necessary in an emerging capitalist one. Apart from being summoned to depose, it is well worth noting Greenspan?s humility to publicly admit that he may have been wrong about certain things. Ben Bernanke, his successor and current Fed chief, admitted the same thing. When was the last time an Indian policymaker admitted making a mistake? And we all know that a number of mistakes have been committed in the not-so-distant past. The world?s largest democracy deserves more explanations from those who take key decisions.
