Alan Greenspan’s ‘shocked disbelief’

Yeah, that line from “Casablanca” is horribly overused, the one about being shocked, shocked, to find gambling going on in Rick’s cafe. But Alan Greenspan trotted out a version of it today. The former Fed chairman said he is “shocked” at the meltdown of U.S. credit markets and that he made some mistakes in his beliefs about deregulation.

What a difference nearly three years makes.

“The impressive performance of the U.S. economy over the past couple of decades offers clear evidence of the benefits of increased market flexibility,’ said Alan Greenspan back in late 2005.

Today, at the House Oversight Committee, he struck a different tune: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity are in a state of shocked disbelief.”

“Yeah, it was typical Greenspan speak,” said Morris Davis, a former Fed economist now at the University of Wisconsin. “It looks like he had perfect foresight at the time, but the truth of the matter is I think he was ignoring a lot of people that suggested there might be a big problem.

Davis said Greenspan did get conflicting advice, but some economists warned him that the housing market could collapse. So, was Greenspan genuinely surprised? Yes, said Douglas Diamond, who teaches finance at the University of Chicago and consults for the Fed.

“Well, I think he had a very simple view of the world that free markets always provided very good incentives.

Today, Greenspan avoided taking personal responsibility for the crisis. But he did say it was a mistake to assume that banks would stay out of trouble to protect their shareholders.