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Greenspan admits derivatives should have been regulated!

This is one of those “hell freezes over” moments that I never thought would happen.

Former Chairman of the Fed from 1987 to 2006 Alan Greenspan is testifying before Congress, and has admitted that he was “partially” wrong to oppose regulation of derivatives. But he still blamed the financial meltdown on a “once-in-a-century credit tsunami”.  I find that ironic since it seems obvious that when you reward lenders for making lots of mortgage loans, and take away any financial repercussions if a loan fails (which is what derivatives did), then what you will get is lots of bad loans.

In 2005, Greenspan famously declared that private regulation was better at constraining excessive risk-taking than government regulation. It hasn’t worked out that way. Greenspan expressed “shocked disbelief” that financial companies didn’t police themselves enough to prevent surging losses. But when CEOs are rewarded solely on the current quarter’s performance, and are personally protected from bad long-term decisions by a fat golden parachute, why would they have any incentive to be proactive?