This past Thursday, former Fed chairman Alan Greenspan testified about his role in the economic crisis before the House Oversight and Government Reform Committee headed by Rep. Henry Waxman. While a vocal chorus of critics, including at least two economics Nobel Prize winners, contend Greenspan is largely responsible for the market collapse, Greenspan thus far maintained he was entirely without blame. Yet his congressional testimony sounded, at times, unexpectedly contrite. The parts I found most interesting:

Alan Greenspan: Uncritical acceptance of credit ratings by purchasers of these toxic assets has led to huge losses. It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights with mathematicians and finance experts, supported by major advances in computer and communications technology. A Nobel Prize was awarded for discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year, because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. [...]

I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such is that they were best capable of protecting their own shareholders and their equity in the firms. [...]

I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

Chairman Waxman: In other words, you found that your view of the world, your ideology, was not right, it was not working.

Alan Greenspan: Precisely. That’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

The Times has a summary, and a complete preliminary transcript is available from the Committee website, which includes the prepared statements that were delivered. If you’re looking to figure out more of how the crisis came to be, skimming the transcript is a good place to start. And the Times’ Bits blog has a fascinating post putting Greenspan’s comments about risk management systems in context. In short, computers don’t help if you lie to them.