Alan Greenspan, formerly America's most powerful economist and header of the Fed, to Congress yesterday: D'oh!!
As a note of background, our whole world economy is based on the concept of risk. Economists, such as Greenspan, have devised theories and written papers-- and even won Nobel Prize -- about how risk is incorporated into the financial system. When pressed on the fact Greenspan reached for a pink glazed donut and told the House Oversight Committee, 'Hey, we had one thing wrong.'
Turns out it was a pretty big thing. All those theorists missed something.
Here it is in a netshell: As Greenspan explained in one sentence, he and other economists have always worked under the assumption that banks and other financial institutions would always act in favor of the long-term health of the institution and their investors.
Greenspan, academics and government regulators never thought that banks and investment houses would act like plumbers with a $30,000 credit limit on their VISA bills and go our and buy a new car and a flat screen TV. Then when they couldn't pay that back, refinance their mortgage to the max on low-wage incomes. Someone please get Alan another donut!