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Did Greenspan Lead Us Here?

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A House panel investigating the series of events that led to the current financial crisis has summoned a true cast of characters to Capitol Hill including Ben Bernanke and Hank Paulson. But one man who landed squarely in the line of fire was Former Federal Reserve Chairman Alan Greenspan.

The Bubble Burst

Some Wall Street watchers blame for former Fed Chief for the current crisis because he lowered interest rates substantially in the wake of the September 11th attacks. Had he not made mortgages so “cheap” the housing bubble would not have expanded so quickly or rapidly, they say.

Greenspan himself described the financial crisis as a "once-in-a-century credit tsunami." And testifying before a House panel, he acknowledged that the crisis has exposed flaws in his thinking and in the workings of the free-market system.

During questioning, Greenspan was challenged about various statements he had made during the five-year housing boom, including forecasts that it was unlikely that there would be a nationwide collapse of home prices.

Greenspan said he had failed to predict a significant decline in home prices because the country had never experienced such a decline before.

One of Greenspan’s biggest critics is contrarian investor Bill Fleckenstein. He’s the author of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.” Fleckenstein tells us, “people held Greenspan in such high regard” that they became complacent. “It led them to a reduced appreciation for risk and then the Fed didn’t regulate the banks and check for bad loans.”

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Lack of Trust

As for the current lack of trust Greenspan said his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had been proven wrong. He called this a "mistake" in his views and said he had been shocked by that.

Greenspan said he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions.

Solutions

Bill Fleckenstein has some ideas. He says regulators have to change their approach and not only target interest rates as the tool for stimulating the economy. “The other thing we need to do is make financial statements mean something.”

If you can separate politics from the Fed, you’d be onto something, adds Guy Adami.

On another front, FDIC Chairwoman Sheila Bair today revealed that banking regulators are working closely with the Bush administration to create a loan guarantee program that would serve as an incentive for servicers to modify home loans, the chairman of the Federal Deposit Insurance Corp said on Thursday.

Sheila Bair said the $700 billion financial rescue plan passed earlier this month gives the U.S. Treasury Department the power to use loan guarantees and credit enhancements to facilitate loan modifications and prevent avoidable foreclosures.

"Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards," Bair said in prepared remarks to be delivered before the Senate Banking Committee. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

Bair did not immediately give an estimate for how large such a loan guarantee program could be, but said the bailout legislation provides "authority that could hold significant promise for future loan modifications."


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Trader disclosure: On Oct.23 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MCD), (MSFT), (WMT), (SDS), (UUP), (BNI); Seymour Owns (AAPL), (F), (MER); Seygem Asset Management Owns (RIO); Najarian Owns (BNI) And Is Short (BNI) Calls

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