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.”
October 30, 2009; 3:25 PM ET
Categories: The Ticker | Tags: Alan Greenspan, David Cho, Goldman Sachs, Hank Paulson, Tim Geithner
Save & Share: Previous: Stocks open down on consumer spending news
Next: Boo! Stocks end October on massive sell-off
Posted by: wayoffbaseguy | October 30, 2009 4:55 PM | Report abuse
Posted by: sasquatchbigfoot | October 30, 2009 5:12 PM | Report abuse
Posted by: demtse | October 30, 2009 5:17 PM | Report abuse
Posted by: djrhood | October 30, 2009 5:30 PM | Report abuse
Posted by: 1000PointsofFright | October 30, 2009 5:51 PM | Report abuse
Posted by: harmiclir | October 30, 2009 5:58 PM | Report abuse
Posted by: hyroller56 | October 30, 2009 6:07 PM | Report abuse
Posted by: aint2sure | October 30, 2009 6:09 PM | Report abuse
Posted by: ravitchn | October 30, 2009 6:13 PM | Report abuse
Posted by: Garak | October 30, 2009 6:39 PM | Report abuse
Posted by: luridone | October 30, 2009 6:40 PM | Report abuse
Posted by: bsallamack | October 30, 2009 6:42 PM | Report abuse
Posted by: paul_toronto | October 30, 2009 6:47 PM | Report abuse
Posted by: Homunculus | October 30, 2009 7:18 PM | Report abuse
Posted by: braultrl | October 30, 2009 7:25 PM | Report abuse
Posted by: MPATL | October 30, 2009 7:32 PM | Report abuse
Posted by: jewishmother | October 30, 2009 7:35 PM | Report abuse
Posted by: etzalcoatl | October 30, 2009 8:01 PM | Report abuse
Posted by: Whazzis | October 30, 2009 8:07 PM | Report abuse
Posted by: SSTK34 | October 30, 2009 8:46 PM | Report abuse
Posted by: dnjake | October 30, 2009 8:52 PM | Report abuse
Posted by: boog1 | October 30, 2009 9:23 PM | Report abuse
Posted by: arjay1 | October 30, 2009 9:30 PM | Report abuse
Posted by: James10 | October 30, 2009 9:40 PM | Report abuse
Posted by: BoonyTunes | October 30, 2009 9:40 PM | Report abuse
Posted by: charlietuna666 | October 30, 2009 10:11 PM | Report abuse
Posted by: risejugger | October 30, 2009 10:18 PM | Report abuse
Posted by: John1263 | October 30, 2009 10:53 PM | Report abuse
Posted by: Burke3 | November 1, 2009 4:01 PM | Report abuse
Posted by: HBinswanger | November 1, 2009 6:32 PM | Report abuse
The comments to this entry are closed.