A congressional panel investigating the financial crisis accused former Federal Reserve chairman Alan Greenspan on Wednesday of not doing enough to regulate high-risk lending.
Testifying before the commission, Greenspan insisted the U.S. central bank lacked authority to regulate the lenders that issued most subprime mortgages.
Many of those loans to borrowers who couldn't afford them became the toxic assets that sparked the crisis.
Panel chairman Phil Angelides referred to internal documents from staff in the Federal Reserve that recommended "broad prohibitions on deceptive lending."
Angelides said the Fed issued guidance on predatory lending but failed to regulate it.
"Why, in the face of all that, did you not act to contain abusive, deceptive subprime lending?" Angelides, a former California state treasurer, asked Greenspan.
Greenspan pointed to a series of actions he said the Fed took, but Angelides countered that these moves covered only one per cent of the subprime lending market.
"You could've, you should've and you didn't" regulate those lending activities, Angelides said.
Greenspan said government policy of encouraging home ownership created demand for risky loans on the part of government-backed mortgage giants Fannie Mae and Freddie Mac, which inflated the housing bubble. Those firms buy up mortgage loans and package them into bonds that are resold to global investors.
Canada cited for regulation
But Mark Zandi, chief economist at Moody's Analytics, said the decision of the Federal Reserve during Greenspan's tenure not to set national mortgage lending standards was a key factor in the housing bubble — far more than demand from Fannie Mae and Freddie Mac.
Zandi told the panel that countries with tighter regulations, like Canada and Germany, largely avoided the bust, while countries that followed the U.S. model of light regulation fell into crisis.
"The Federal Reserve had that authority," Zandi said in an interview. "They just never acted on it. That was a clear policy decision."
The debate came the same day as U.S. regulators proposed stricter rules for asset-backed securities, the bundles of loans that added to the crisis.
The Securities and Exchange Commission's new rules would require that the Wall Street firms that package and sell asset-backed securities be required to hold at least five percent of the underlying loans — mortgages, credit cards, auto loans — on their own books.
The reasoning is that this would make the packagers of these securities more careful to ensure that borrowers are properly screened and able to repay.