Former Fed Chief Says US Financial Crisis is 'Credit Tsunami'

Former U.S. Federal Reserve Chairman, Alan Greenspan, has predicted further negative impacts for Americans from the U.S. and global financial crisis, which he called a credit tsunami. VOA's Dan Robinson reports, Greenspan and two other current and former U.S. officials, faced tough questioning from lawmakers in a congressional hearing.

The longest-serving chairman of the U.S. central bank until he was replaced by Ben Bernanke in 2006, Greenspan called the financial and credit crisis a "once in a century credit tsunami" brought about by heavy demand for securities backed by sub-prime mortgages.

The crisis has been much broader than anything I could have imagined, Greenspan said, leaving him and other economic experts in a state of shocked disbelief.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," he said. "Fearful American households are attempting to adjust as best they can to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

For the crisis to end, Greenspan added, U.S. housing prices must stabilize, something he said is still many months in the future.

A future economic landscape, he said, would be characterized by exceptional investor caution, particularly where investment instruments are concerned, leading to a more sustainable sub-prime mortgage market.

Greenspan has faced criticism that as Federal Reserve chairman for more than 18 years, he resisted tighter market regulation, and kept U.S. interest rates too low, fueling a surge in risky sub-prime mortgages.

Committee Democrats questioned decisions and statements he made about the U.S. housing market.

Democratic panel chairman Henry Waxman asked if the crisis has changed his ideological positions on regulation and the operation of free markets.

"In other words, you found that your view of the world, your ideology was not right, it was not working," asked Waxman.

"Precisely, that is precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well," Greenspan replied.

Securities and Exchange Commission chairman Christopher Cox was sharply challenged by Maryland Democrat Elijah Cummings about efforts now to crack down on one aspect of the credit mess.

Cummings: "You became SEC chairman over three years ago. Why didn't you act sooner to require this disclosure of credit default swaps?"

Cox: "If you wish me to answer explicitly, where was I, I was here with you, indeed I was vice-chairman of this committee, when Congress had the opportunity to do what I am asking Congress to do now, which is to close this regulatory hole."

Cummings: "But I'm talking about the three years that you were there, we paid your salary, the taxpayers the ones that are losing their homes right now paid your salary for three years."

Minority Republicans also questioned decisions by Greenspan, Cox, and former Treasury Secretary John Snow, although Republican criticisms were not as sharp as Democrats.

In a separate hearing, the U.S. treasury official overseeing the $700 billion program approved by Congress to rescue financial institutions, said it is having a positive effect, but Neel Kashkari added a cautionary note.

"Since the announcement of our capital purchase program, we have seen numerous signs of improvement in our markets and in the confidence in our financial institutions," he said. "While there have been recent positive developments, the markets remain fragile."

Thursday's hearing took placed amid continued volatility in U.S. financial markets, amid investor concerns about the economy, and new figures showing increases in home foreclosures.

At the White House, press secretary Dana Perino declined to use the word recession to describe the economic situation, but said President Bush knows the country is in "for a rough ride."