Why Alan Greenspan didn’t succeed in fueling a sustainable economy?

Considering the strength of evidence , recently Mr Alan Greenspan offered a new explanation of the recent banking turmoil. He acknowledged a true responsability in non regulating derivatives market. By the mean he confessed that he found a hole in his financial views. He did’nt believe at that time that banks and other banking institutions could choose to act unwisely and put their own shareholders at risk of bankruptcy by extraordinary leveraging and uncontrolled derivatives emissions. He was convinced by his past experience that self regulation would have worked. More he accused the top economists to put only the good data in their model of risk and to forget the black scenario! After that medias and folks were puzzled and search the true meaning of this testimony as they did when AG was FED chairman. It is a pity! Fortunately, others like John Gapper are astonished and I share his views.
Perhaps part of the truth is simpler!
AG said that he regrets to undo more regulation. In a sense it is a big lie! Indeed he was a heavy interventionist. We all know that the most powerful regulation of investors behaviour is the price of borrowed money. The higher the interest rate the lower the euphoria, the lower the rate the more explosive tendancy to borrow even if you have cash. And during years the low interest rates and even the real negative interest rates were under the control of AG. If we add to this upregulation of borrowing the federal state incentives in a specific economic sector namely the housing, we get an enhancing effect of cutting rates and a misallocation of money. It is not fantasy to see the deep cuts and the high volatility of interest rates as the main explanations of the magnitude of the recent crisis. In this perspective perhaps AG could have been right about self regulation but only in a neutral and long term managed interest rates environment.
Finally there is a paradox in this story. Usually AG is depicted as a free market disciple especially in Europe. Obviously he missed the monetary policy of the Chicago school which emphasized the role of easy credit in unintended negative effects and the necessity of a neutral monetary policy.
It is hard to believe that Mr Alan Greenspan was not aware of that but one can consider that politic pressures turned him toward short term management of monetary supply. Obviously we shall wait for further testimonies.

http://blogs.ft.com/gapperblog/2008/10/greenspans-views-get-curiouser-and-curiouser/#comment-4172