Greenspan defends tenure; says roots of financial crisis extend to fall of Berlin Wall

In testimony before an independent commission, Greenspan, the former Federal Reserve chairman whose tenure has been criticized since the crisis, said securitized U.S. sub-prime mortgages were the immediate trigger of the crisis, but added that a shift in global economics triggered by the end of the Cold War also played a part.

The fall of the Berlin Wall sparked a surge in exports from developing countries and a rate of growth that led to severe trade and savings imbalances between countries such as China and the United States. Those imbalances played a role in the crisis, Greenspan suggested.

Those global capital flows helped keep interest rates low in the United States and fueled the housing market boom.

Before the crisis, Greenspan was seen as a guiding force of a long rise in U.S. wealth, but his image has taken a beating from the crisis. Critics have said Greenspan missed the financial crisis and did too little to rein in activities by institutions under the Fed’s power.

Greenspan offered a defense of his tenure, stating that the primary players in the sub-prime crisis were not under the Fed’s power. He also said the rise in global demand for securitized sub-prime mortgages was a reason for the financial crisis, not the creation of sub-prime mortgages themselves.

A significant portion of Greenspan’s written testimony focused on his insistence that the Federal Reserve was “quite active” in pursuing protections for consumers.

Greenspan’s highly anticipated testimony comes before the Financial Crisis Inquiry Commission, an independent panel looking into the causes of the financial meltdown. The commission is to provide a report by the end of the year.

To prevent a future crisis, Greenspan said, the “primary imperatives” are to increase risk-based capital and liquidity requirements on banks and to significantly increase collateral requirements for globally traded financial products, no matter the financial institution making the trade.

He also said the doctrine of “too big to fail” should not be allowed to stand.

Because of the government bailouts of large firms, Greenspan said market players have come to believe that every significant financial player would be bailed out by taxpayers if the need arose.