WASHINGTON – Lawmakers have called key players from the past and present to congressional hearings in an effort to find out what caused the biggest financial crisis since the 1930s and determine how the government plans to get the nation out of the mess.
Alan Greenspan, the chairman of the Federal Reserve for 18 1/2 years, was to be the star witness Thursday before the House Oversight and Government Reform Committee. He faces questions about actions the government took or didn't take that might have contributed to the boom in subprime mortgages and the subsequent housing market collapse that has led to the loss of billions of dollars in investments.
Meanwhile, Neel Kashkari, the interim head of the government's $700 billion rescue effort, and other government officials were going before the Senate Banking Committee to lay out their plans for implementing the massive program.
Both hearings were expected to be contentious as lawmakers, already upset about having to vote for the biggest bailout in U.S. history, seek answers to what went wrong and try to determine why the government's rescue effort, which just cleared Congress on Oct. 3, already has undergone a radical overhaul.
All the action in Washington was taking place against a backdrop of continued turbulence on financial markets around the world. The Dow Jones industrial average plunged by 514 points Wednesday amid fears that the government intervention will not be enough to prevent a serious global recession.
Asian stocks fell for a second consecutive day Thursday, with South Korea's market sinking 7.5 percent. Japan's Nikkei 225 stock average closed down 2.5 percent, and Hong Kong's Hang Seng Index was down 4.7 percent. European stock markets were modestly lower.
While conducting major hearings so close to an election is unusual, House Oversight Committee Chairman Henry Waxman, D-Calif., said the current crisis was so serious that Congress could not wait until a new administration arrives in January to find out "what went wrong and who should be held accountable."
Democrats see the prime culprits as greedy Wall Street executives and lax government regulations under a Republican administration, a view that the administration and Republicans in Congress dispute strongly.
Once praised as the "maestro" of the U.S. financial system during the 1990s economic boom, Greenspan, who was succeeded in 2006 by Ben Bernanke, was likely to find himself defending actions he took that are being blamed for contributing to the current crisis.
Critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.
Greenspan, true to his Republican free-market principles, successfully opposed attempts to impose tighter controls on complex financial contracts known as derivatives, which are largely unregulated and which some see as a contributing factor in the current problems.
Greenspan recently described the current episode as the type of wrenching financial crisis that comes along only once in a century. He has defended the use of derivatives, so-named because their value is derived from the value of an underlying asset. He said they were useful in helping to spread risks.
Lawmakers in particular want government officials to explain why the emphasis in the rescue package has switched from a program that initially was aimed at buying billions of dollars of troubled mortgage-related assets from banks as a way to spur them to resume more normal lending.
A week ago, Treasury Secretary Henry Paulson announced that the program now would have as a major component the purchase by the government of $250 billion in stock in hundreds of U.S. banks, including $125 billion that would go to nine of the largest institutions. Paulson has said that the fast-moving nature of the crisis convinced him that money needed to get out more quickly as a way to encourage banks to start lending again.
But questions have been raised about whether the huge infusion of government money will actually spur more lending, especially after several banks have said they planned to employ the new capital to help finance purchases of weaker rivals.
Sens. Charles Schumer, D-N.Y., Jack Reed, D-R.I., and Robert Menendez, D-N.J., sent a letter to Paulson on Wednesday complaining that Treasury had failed to establish adequate standards "to assure that banks put this capital to good use in the lending markets."