Greenspan Admits “Flaw in Model”

Former Federal Reserve Chairman Alan Greenspan said Thursday that he should not have resisted regulating the market for mortgage-backed securities, the collapse of which is causing a worldwide “credit tsunami.” Testifying before Congress, he acknowledged that the failure of expected self-regulation represented “a flaw in the model” he used to analyze economics.

The whole intellectual edifice . . . collapsed in the summer of last year.

Indeed, the conservative argument that unregulated markets always work best is in ruins. Attempts to shift the blame are also disintegrating in the face of the facts, from federal housing data showing how unregulated banks drove the growth of the subprime market, to a report from the non-partisan Brookings Institution that warned months ago that regulators were ignoring warnings about the mounting risks in the mortage-backed securities market. Resistance to regulation on Greenspan’s watch allowed U.S. banks to export toxic debt around the world.