Greenspan’s Amnesia

Alan Greenspan continues his campaign to deflect attention from his failure to regulate the shadow banking system. In today’s Financial Times piece he points to the success of FDIC-insured institutions as evidence that what is needed to prevent a crisis like the current one is adequate supervision of capital requirements:

What, in my experience, supervision and examination can do is set and enforce capital and collateral requirements and other rules that are preventative and do not require anticipating an uncertain future. It can, and has, put limits or prohibitions on certain types of bank lending, for example, in commercial real estate. But it is incumbent on advocates of new regulations that they improve the ability of financial institutions to direct a nation’s savings into the most productive capital investments – those that enhance living standards. Much regulation fails that test and is often costly and counterproductive. Regulation should enhance the effectiveness of competitive markets, not impede them. Competition, not protectionism, is the source of capitalism’s great success over the generations.

New regulatory challenges arise because of the recently proven fact that some financial institutions have become too big to fail as their failure would raise systemic concerns. This status gives them a highly market-distorting special competitive advantage in pricing their debt and equities. The solution is to have graduated regulatory capital requirements to discourage them from becoming too big and to offset their competitive advantage. In any event, we need not rush to reform. Private markets are now imposing far greater restraint than would any of the current sets of regulatory proposals.

What’s amazing about the American public is that the pitchforks come out over the AIG bonuses–the more we learn about them, the clearer it is that Liddy made the right call paying the bonuses and Obama should have gotten out in front and explained why they were justified–but we sit here complacently allowing Greenspan to peddle this hogwash.

The Fed Chairman is a bank regulator. To have the Chairman who presided over the biggest failure of the banking system lecture the world on regulation is breathtaking, not to mention tone deaf. Whatever the complexities of regulating the shadow banking system or supervising the ratings agencies are, acting as if the Fed Chairman bears no responsibility for the excesses that took place on his watch is a recipe for moral decline.


We Need a Better Cushion Against Risk By ALAN GREENSPAN Financial Times; March 27, 2009

Originally published at the Big Picture and reproduced here with the author’s permission.

5 Responses to "Greenspan’s Amnesia"

  1. Guest   March 27, 2009 at 8:24 am

    Barry, I love you man! Keep up the candid commentary. I find it refreshing. Greenspan droped the ball to avoid conflict during his time as Chairman. He road the wave of irrational exuberance to keep Wall Street, congress, and the pres happy. Yehawwww…ain’t life grand!

  2. Anonymous   March 27, 2009 at 12:10 pm

    Just name-calling. A completely worthless piece.

  3. P-analyst   March 27, 2009 at 2:06 pm

    No wonder the public is angry about bonuses – rightly so – but it’s also something everybody can understand. Whereas the hogwash of Greenspan, or the government’s plans to save the financial system are only comprehensible to academics or economists. And the growing tendency of the administration to use euphemisms like ‘legacy’ assets instead of old ‘toxic’ doesn’t help to clarify matters for the public. On the contrary, it resembles Bush-Rove’s strategy to hide the ugly fact.

    • Guest   March 30, 2009 at 9:41 am

      I almost fell off my chair when I first saw the term “legacy assets.” It is not an apt description of toxic junk. Even using the term “assets” to describe these financial vehicles is a misnomer at this juncture.

  4. NFrazier   March 28, 2009 at 1:31 am

    Someday, it may be understood that inflation targeting within technologically modern and developed economies that have relatively decompressed tax brackets may paradoxically steer such economies into liquidity traps. Several years from now, for example, the Fed might be granted the authority to determine the rate at which interest on insured bank deposits is taxed. It might also be granted authority to levy an additional tax on corporate earnings. If the Fed were mandated to use these tools (and reserve requirements) to keep the real aggregate (pre-tax) earnings/price ratio above 4% in the US equity markets, asset bubbles might be tamed. Furthermore, the structural efficiency of equity financed CAPEX might even be kept above some minimum standard – and thereby insure that less of it need to be shed during a downturn. Additionally, if and when such a tamed bubble burst, more cash would be available during downturns to support consumer spending, invest back into the equity markets, etc. By regulating asset bubbles via such direct counter-cyclical fiscal policy, the Taylor rule and the inflation target may not even need to be significanlty altered.The point is that someday people might say that Greenspan was just doing his job applying the macroeconomics that was understood at the time.If he had said, alternatively, that not only did he sense “irrational exuberance” in the market, but was going to widen the band around the inflation target because he thinks he’s right – how would people have responded then? (Possibly the way they are responding now…) Sometimes it takes a crisis before the political will is there to change a policy rule.