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 http://www.ft.com/cms/s/0/9c158a92-1a3c-11de-9f91-0000779fd2ac.html
Originally published at the Big Picture and reproduced here with the author’s permission.