Alan Greenspan acknowledged Thursday that U.S. regulators had failed to grasp the magnitude of the financial crisis, but the former Federal Reserve chairman argued that low interest rates were not to blame.
In a paper he is due to deliver at the Brookings Institution on Friday, Greenspan, who was Fed chairman from 1987 to 2006, examines the factors that caused the global financial crisis and plunged the U.S. economy into one of the worst recessions on record.
Greenspan said the relatively minimal fallout from the bursting of the dot.com bubble led regulators to believe that future asset bubbles would pose a limited risk to the economy.
He also blamed financial firms for relying too heavily on ratings agencies and their own risk management offices during the boom years, when investment banks leveraged billions of dollars worth of assets, including mortgage backed securities, that later proved to be worthless.
"In the growing state of high euphoria, risk managers, the Federal Reserve, and other regulators failed to fully comprehend the underlying size, length, and impact of the negative tail of the distribution of risk outcomes," Greenspan wrote.
"For decades, with little to no data, most analysts, in my experience, had conjectured a far more limited tail risk," he continued. "This is arguably the major source of the critical risk management system failures."