Lessons Learned From Housing Bubble Burst

Alan Greenspan, who was Chairman of the Federal Reserve of the United States (1987-2006), has admitted recently that he had made some mistakes while acting as the “Fed Chair”.

It must be stated that Alan Greenspan is very respected in his field of work. During his time in office, he was responsible for creating long periods of robust economic prosperity.

Greenspan has held tight to his ideology believing that laissez faire  does work. Theoratically he is right on this one.

Capitalism is a system of free enterprise. Economic decisions are made by individuals to obey the law of supply and demand. This ideology was true in the seventeeth century, and is true today. What is important to recognize is this — individuals sometimes do not obey the laws of supply and demand, at the expense of the public’s interest.

As economic giant Alan Greenspan  and other economists understand, there are flaws in the system. Government must intermittently intervene and regulate or stimulate the economy. In the process, mistakes will be made.

As we have witnessed in the subprime mortgage crisis, too little government intervention can lead to disaster.

“Derivatives  can be used to mitigate the risk of economic loss arising from changes in the value of the underlying.” But, unregulated “hedging” does create an environment that bolsters speculation and corruption, which has been practiced in today’s business arena. Greenspan is incorrect on this matter even though he will not admit it.

While Greenspan is humble, conservative, and very professional, he has erred in his judgement regarding to irresponsible lending. Mr. Greenspan’s mistake  he admits — “presuming that the self interests of organizations, specifically banks and others, were such,  as at they were best capable of protecting their own shareholders and equity in the firms”.

Previously Greenspan had defended himself and denied blame. Mr. Greenspan reluctantly answered: “Yes, I had found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.”