In a BBC Two interview, former Fed chief Alan Greenspan waxed fatalistic, saying that another financial crisis is inevitable due to animal spirits. In his view, booms and busts are endogenous to the capitalist system, crises being the outcome of long periods of prosperity. I agree with this assessment. But, it is surprising to hear coming from Greenspan as he sounds almost like Hyman Minsky, suggesting that economic stability leads to instability.
However, lest you thought he had given up his free-market ideology, he concludes warning that increased regulation would only make matters worse.
In order to prevent the situation arising again financiers and governments should look to clamp down on fraud and increase capital requirements for banks, the former central banker said.
Greenspan view on global economy
Regulations targeting the latter would mean banks would be forced to hold enough money to cover their normal operations and honour withdrawals.
However despite his belief in a brighter future, the former Fed chief did warn that the path to recovery should steer clear of protectionism as applying strict regulations could hamper recent developments that have opened up global trade.
“The most recent endeavour to re-regulate is a reaction to the crisis. The extraordinary impact of these global markets is making a lot of financial people feeling they have lost control.
“The problem is you cannot have free global trade with highly restrictive, regulated domestic markets.”
On the whole, Greenspan’s analysis makes sense. However, his conclusions are flawed. Greenspan, in his ideological fervour, has forgotten that his role as a central banker was antithetical to the concept of free markets.
Last night in the links, I ran a story from the Sydney Morning-Herald which is more to the point. There is no such thing as a free market. There is more restrictive regulation, where we seem to be headed. And there is less restrictive regulation, which I prefer. But markets are never completely free. The zeal shown by Greenspan is deregulation as crony capitalism and makes the inevitable busts of which Sir Alan speaks that much more destabilising.
Market crisis ‘will happen again’ – BBC News (nice video included)
Originally published at Credit Writedowns and reproduced here with the author’s permission.