Greenspan & What’s Wrong with Capitalism

Edward Gramlich, a former governor of the Federal Reserve, accuses Greenspan of rejecting the idea of attempting to regulate predatory lending, perhaps preventing the subprime meltdown affecting the economy today.

Greenspan responds by saying it would take a lot of effort and probably be futile.

Both sides have a grain of truth. No doubt regulation might have prevented a number of tragic outcomes, but capitalism creates incredible innovations — not so much in the product side (read General Motors, Ford, ….) but in the financial side — avoiding taxes, regulation, and the like.

Ip, Greg. 2007. “Did Greenspan Add to Subprime Woes? Gramlich Says Ex-Colleague Blocked Crackdown On Predatory Lenders Despite Growing Concerns.” Wall Street Journal (9 June): p. B1.

“Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.”

There is “a very large number of small institutions, some on the margin of scrupulousness and very hard to detect when they are doing something wrong,” says Mr. Greenspan, who retired in February last year. “For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it’s not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits.”

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