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Post exclusive: Greenspan says bad big banks should be busted up

Alan Greenspan, the former chair of the Federal Reserve, created a bit of a stir when he suggested recently that big banks should be broken up. You could hear the jaws dropping across the economic blogosphere.

“If they’re too big to fail, they’re too big,” he said earlier this month. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

As it turns out, Greenspan says he was talking about busting up only the big financial firms that are failing, The Post's David Cho reports.

“A policy of too-big-to-fail cannot be allowed to stand, if we wish to have a growing economy and rising standards of living,” Greenspan said, in an interview Wednesday with Cho. Greenspan explained that when a large financial firm becomes insolvent it should be seized by the government, broken into pieces and sold off in the private market.

“Most broken up units, separated from toxic ones, will survive,” he said. “The toxic ones I presume will not. Once you mix toxic assets with good assets, the market value of the sum of the two is less than those assets separated.”

“There is a limited amount of national savings in a society,” he added. “If you are going to use some of the savings to prop up companies with marginal profitability, meaning for instance, GM and Chrysler, those savings cannot also be used to finance new cutting-edge technologies.”

Some large financial firms might be prime candidates as well, given that they have some very good businesses combined with major inefficient ones.

But what about too-big-to-fail Wall Street firms that are doing well, such as Goldman Sachs or J.P. Morgan Chase? Greenspan says he doesn't see a reason why they should be broken up, if they are efficient.

Greenspan also took issue with a core element of the regulatory reform plan, advocated by Treasury Secretary Timothy F. Geithner, to set up a council of regulators and the Federal Reserve to to seek out and reign in activities that could pose a threat to the entire financial system.

“My problem is what is being proposed now presupposes a state of forecasting ability that we do not have,” he said. Over his nearly 19 years at the central bank, Greenspan said he learned that, as a regulator, “you only dimly see the future.”

In fact, he added: “I remember time and time again, where I would think long and hard, whether a small 25 basis-point move was the right move to make, and I was never quite sure we were doing the right thing until after the fact…. The truth of the matter is we know in retrospect, but we never know in real time.”

Setting up government agencies to hunt for threats to the entire system before failures actually occur will "create a bias toward regulatory solutions, and risks that we allow political judgments rather than economic judgments to prevail" since regulators are rewarded for being aggressive, he said.

The regulators “will find, 10 times more potential risks than really exist and that’s where the danger lies,” he said. As a result, financial innovations that could help the efficient flow of “our scarce capital” would be stifled.

Though it can be easily measured when bubbles expanding and when risk is being underpriced, virtually no one can see when the bubbles will burst and what the fallout could be.

When problems arise in plain view, the markets almost immediately correct the issue, he said. For example, earlier this decade, most investors expected the next crisis would be triggered by the nation’s trade and investment deficit, and the collapse of the U.S. dollar. As a result, traders sold the dollar off. The crisis went away on its own.

Greenspan, however, agreed with Geithner’s proposals to increase bank capital, which ensures these firms will have more of a buffer in a downturn, as well as the idea to grant the federal officials the authority to break up financial firms that have failed. These regulatory reforms make good sense, he said, and do not require federal officials to predict the future.

Michael Barr, Treasury’s assistant secretary for financial institutions, responded: “We agree with Greenspan that it is impossible for anyone to predict the future and that's why our plan has other safeguards built into it, such as thicker capital buffers and the ability to dismantle a financial institution that threatens our economy.”

Overall, the former Fed chair had high praise for Geithner, who he worked with to solve several crises in the 1990s, as well as his predecessor at the Treasury Department, Hank Paulson.

“They were responding to crises with very little history, very little precedent,” Greenspan said. “Given the types of mistakes they could have made… considering the type of problems Paulson and Geithner had been facing, I think they did a very good job.”

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By Frank Ahrens  |  October 30, 2009; 3:25 PM ET
Categories:  The Ticker  | Tags: Alan Greenspan, David Cho, Goldman Sachs, Hank Paulson, Tim Geithner  
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Comments

Too big to fail is a fallacy. The truth is Too big can only fail.

We need to revamp our financial markets, our definition and goals of capitalism, and how we invest and save.

Milton Friedman is dead, as are his ideas. We need a fresh approach and we aren't going to get it from Wall Street insiders like Timmy Boy.

We need to start breaking up the monopolies our 401k dollars have produced. Wall Street has become the enemy of Main Street, and their winning has meant that everyone loses.

Posted by: wayoffbaseguy | October 30, 2009 4:55 PM | Report abuse

Greenspan is still angry that Brooksly Borne was able to predict what he, the Ayn Rand Acolyte, was too blind to see. If you believe the man who prevented government regulation of the derivatives markets because he had unquestioned faith in the Free Market, I've got a bridge in San Francisco Bay to sell you.

Posted by: sasquatchbigfoot | October 30, 2009 5:12 PM | Report abuse

Why on earth are people still listening to what Alan Greenspan has to say. This man was part of the problem.


Posted by: demtse | October 30, 2009 5:17 PM | Report abuse

Greenspan is correct that these too big to fail banks should be broken up. But that said, he should shut up and go away. Greenspan and his 18 years of easy money policy caused this mess.

Posted by: djrhood | October 30, 2009 5:30 PM | Report abuse

Believing in the social and economic theory of rational self-interest is neither rational nor in the nation's interest.

Posted by: 1000PointsofFright | October 30, 2009 5:51 PM | Report abuse

The only real jaws dropping are at the chutzpah Mr. Greenspan demonstrates by saying anything at all about the financial crisis that was/is the fruit of his tenure at the Fed. I do not recall any comments about financial regulation by Greenspan during his long tenure as chairman when he had the attention of the entire world focused on his every Delphic utterance and the power to put in place any real change the structure of financial markets. I do recall comments to the effect that it would be cheaper to "clean up" the mess after a market crash than to put in place restraints that might make a crash less likely.

Will this man please just go away?

Posted by: harmiclir | October 30, 2009 5:58 PM | Report abuse

Greenspan ,the ultimate hypocrite.Here is the main guy who was instrumental in creating the financial crisis we are in today.

LIAR,THIEF !!!

He and his grandchildren should be hanged !!!!

Posted by: hyroller56 | October 30, 2009 6:07 PM | Report abuse

A guilty conscience speaking out.....finally?

Posted by: aint2sure | October 30, 2009 6:09 PM | Report abuse

Greenspan should be shot!

Posted by: ravitchn | October 30, 2009 6:13 PM | Report abuse

OMG, what would John Galt say?

Posted by: Garak | October 30, 2009 6:39 PM | Report abuse

Another discredited disciple of the discredited Milton Friedman. At least he's taking a few baby steps away from his mentor.

Posted by: luridone | October 30, 2009 6:40 PM | Report abuse

Michael Barr, Treasury’s assistant secretary for financial institutions, responded: “We agree with Greenspan that it is impossible for anyone to predict the future
############################
Banks crashed in the 1930's by using deposits to trade securities instead of making loans with their vaults filled with worthless paper.

The vaults of the banks in 2008 were again filled with worthless bits of paper after allowing banks to once again use deposits to trade securities instead of making loans by the repeal of Glass Steagall.

I see in my crystal ball the future and that banks will again have vaults filled with worthless pieces of papers unless Glass Steagall is brought back.

Would it not be nice if those in government actually learned from mistakes?

Posted by: bsallamack | October 30, 2009 6:42 PM | Report abuse

Greenspan's opinion is of course correct but to many people, he has lost his right to lecture others because of his cheap money policy was instrumental in allowing the real estate bubble to grow. A better motto would be "any bubble that is too big to burst is too big" and must be stopped while the party is still going strong.

Posted by: paul_toronto | October 30, 2009 6:47 PM | Report abuse

Word.

Posted by: Homunculus | October 30, 2009 7:18 PM | Report abuse

Greenspan's laisse faire attitude towards the banking industry was part of the problem. Even if his assessment is correct, we'd listen to him WHY???

Posted by: braultrl | October 30, 2009 7:25 PM | Report abuse

Alan--this is something Brooksly Borne said 10 years ago and you put the kibosh on her entire career!!! Shortly after putting the might of the entire government on her back her predictions came true. STILL you failed to recognize what could and would happen to us. Why? Because Ayn Rand had written in works of COMPLETE FICTION the way we were running is the way it should be?! Please. Wonder what shape we'd be in now if your favorite author had been Stephen King? Halloween economy 24/7? Candy corn to replace the US dollar?

Since the PBS report detailing how involved you were in all of this hit the airwaves exposing your stategy for all those years was based Ayn Rand, I can't even LOOK at you, much less listen to anything you have to say. You gave this whole mess the go ahead and now you're trying to weigh in? Please.

President Obama - HIRE BROOKSLY BORNE!!!

Posted by: MPATL | October 30, 2009 7:32 PM | Report abuse

A bit too little too late, won't you say, Mr. Greenspan?! Especially considering that all those outlaw banks got too big under your "leadership". Maybe he's getting old and forgetting wich side he's been on for... for... forever!

Posted by: jewishmother | October 30, 2009 7:35 PM | Report abuse

In the article, Greenspan said he learned that, as a regulator, “you only dimly see the future.”

Another lame excuse to cover your sorry ass Alan? You should have listened to former CFTC Chair Brooksley Born who had the foresight to see the problems that derivatives would cause instead of thrashing her in her efforts to have them regulated.

Posted by: etzalcoatl | October 30, 2009 8:01 PM | Report abuse

LOL!!! It is wonderful how we have all found as issue to agree on. Yes, Greenspan should go away. It is amazing that he has the nerve to comment as if people will listen. Even when he has a good idea, it is tainted by his failure to manage the situation while in office.

Brooksly Borne should be the one that the Fed/White House/Congress listens to. I agree.

Posted by: Whazzis | October 30, 2009 8:07 PM | Report abuse

Ah if only Germany had only won world war 2. No Greenspans.

Posted by: SSTK34 | October 30, 2009 8:46 PM | Report abuse

We certainly need to have a bankruptcy procedure for any financial institution that becomes insolvent. But the problem with such a procedure is not the size of the institution. I doubt that Lehman Brothers was much larger than Washington Mutual. Washington Mutual was doing a business that governement regulators understood and knew how to deal with its failure. Lehman Brothers and AIG's credit default swaps division were doing businesses that nobody understood in markets where the participants did not understand the risks. By now, even Alan Greenspan has conceded the fantasy of his faith in the intelligence of markets. His failure to face up to the responsibility of regulating all the designer derivatives markets was a big contributor to the recent crisis. Unfortunately some committee of regulators charged with some ill defined task of looking for systemic risks is not likely to do much better. We need to face up to constraining the financial system to markets with understood function and risks. Certainly one step in that direction would be separating institutions that deal with the well understood financial functions required to keep the economy functional from those involved in businesses with more risk. Another highly desirable step would be facing up the the reality of designer financial instruments. They may have some value. But the dangers of using financial instruments with risks that nobody understands far outweighs any benefit that they might provide. We have an approval process for drugs that have the potential to same lives. There is no reason why we cannot have an approval process for financial instruments and restrict their use to regulated markets. Anything less is just ignoring the causes of the recent crisis.

Posted by: dnjake | October 30, 2009 8:52 PM | Report abuse

What a windbag. Greenspan is a fan of Ayn Rand. That says it all, really.

He's been drooling gibberish for decades. It caught up with him, but unfortunately at a heavy price for the rest of us.

Why does anybody publish him? Or listen to him?

Posted by: boog1 | October 30, 2009 9:23 PM | Report abuse

Greenspan, WaPost: “There is a limited amount of national savings in a society,” he added. “If you are going to use some of the savings to prop up companies with marginal profitability, meaning for instance, GM and Chrysler, those savings cannot also be used to finance new cutting-edge technologies.”

Short term mentalities in the US economy cannot make capital available to small businesses; they are locked into the Keynesian consumer-only economic structure that is supporting a world economy. There is very few capital resources left in America by these processes and almost nothing available for developing the industrial, energy, agricultural, advanced education and research infrastructures necessary for continued generational growth.

The assets of the 'too big' entities could be transferred to regional capital institutions that allow capital to be available to small busnesses and infrastructures. Complexity Economic models indicate that Keynesian and Marxist models are self defeating in a global economy unless a major percentage, perhaps 60 percent, of the capital ROI is re-distributed within a region infrastructure, THEN the remainder goes to the 'too bigs' or 'socialist central banks' around the world. Keeping the capital in regions supported by federal revenue in-flows along with removing the so-called 'private interprise' institutions who operate internationally might be the only way the American economy can grow regardless of what the rest of the world does.

Posted by: arjay1 | October 30, 2009 9:30 PM | Report abuse

Greenspan was a key player in this financial disaster pushing cheap money and encouraging unbridled free markets and somehow has managed to escape any blame.

Posted by: James10 | October 30, 2009 9:40 PM | Report abuse

Greenspan belongs in prison for all the damage he's done over the years. Better yet, he should be executed - after a trial, of course. Why on earth would anyone still listen to him.

Posted by: BoonyTunes | October 30, 2009 9:40 PM | Report abuse

listening to andrea mitchell probably drove him crazy......she has her head so far up obozo's butt and that is only thing that is keeping holder from prosecuting greenspan.

Posted by: charlietuna666 | October 30, 2009 10:11 PM | Report abuse

"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."

The statement of purpose for the United States Constitution mandates that the federal government be responsible for the the general welfare of citizens of the Untied States. However, the Constitution is not the founding document of the United States. The Declaration of Independence is the founding document of this nation!

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

Capitalism, like socialism, are products of the industrial age. Over the last two centuries, skilled craftsmen who made tools, furniture, homes, etc. were replaced by factories. It takes a lot of money to build a factory, so those who had the money built them. Is this more efficient, yes. Is this good for the craftsmen who lost their livelihood? Not so much! These people no longer have anything to trade.

The people who used to make these things by hand and were paid for their work are now working in factories. Under capitalism, the owners of the factory now receive the fruits of the labor of those who do the work, rather than the workers themselves. This is actually contrary to the vision the founding fathers had for this country. The Founding Fathers followed the writings of John Locke, who suggested that labor is the basis of all property.

The fatal flaw of capitalism is that it has the tendency of concentrating all assets (currency) in the hands of very few. Essentially, trade stops when all assets (currency) are possessed by the few at the top of the economic pyramid. Only a totalitarian political system can sustain laissez faire capitalism because when all means of trade are concentrated at the top, and all means of trade are denied to the masses, revolutions happen; and military force will be required to suppress it!

Posted by: risejugger | October 30, 2009 10:18 PM | Report abuse

Is this the same ayn rand devotee who let the markets run amok during the bush years?

Posted by: John1263 | October 30, 2009 10:53 PM | Report abuse

Alan Greenspan disavowed Ayn Rand and Objectivism years ago, and Objectivists disavowed him years ago.

In fact, Rand disapproved of the whole idea of a Federal Reserve or any governmental intervention in the market.

The claim that the free market collapsed is ridiculous. We've never had a fully free market and have had nothing even close to it for over a century.

Posted by: Burke3 | November 1, 2009 4:01 PM | Report abuse

Greenspan betrayed Ayn Rand and capitalist principles a long, long time ago. He expanded Social Security in the 80s, and in the 90s he became head of the Fed. THERE IS NO FED UNDER LAISSEZ-FAIRE.

Arguably, Greenspan's expansion of the money supply, when he held interest rates at 1% for over a year, created the bubble. If Ayn Rand were alive today, she'd denounce him from the rooftops.

Posted by: HBinswanger | November 1, 2009 6:32 PM | Report abuse

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