Greenspan Finally Agrees with Rushkoff!

Greenspan Says U.S. Should Consider Breaking Up Large Banks

By Michael McKee and Scott Lanman
Oct. 15 (Bloomberg) — U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said.

Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.

“If they’re too big to fail, they’re too big,” Greenspan said today. “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.”

At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac, and the Treasury and Fed bailed out Bear Stearns Cos. and American International Group Inc.

“It’s going to be very difficult to repair their credibility on that because when push came to shove, they didn’t stand up,” Greenspan said.

Fed officials have suggested imposing a tax or requiring higher capital ratios on larger banks to ensure the firms’ safety and reduce some of the competitive advantage from the implied subsidy. Greenspan said that won’t work.

“I don’t think merely raising the fees or capital on large institutions or taxing them is enough,” Greenspan said. “I think they’ll absorb that, they’ll work with that, and it’s totally inefficient and they’ll still be using the savings.”

The former Fed chairman said while “just really arbitrarily breaking down organizations into various different sizes” goes against his philosophical leanings, something must be done to solve the too-big-to-fail issue.

“If you don’t neutralize that, you’re going to get a moribund group of obsolescent institutions which will be a big drain on the savings of the society,” he said.

“Failure is an integral part, a necessary part of a market system,” he said. “If you start focusing on those who should be shrinking, it undermines growing standards of living and can even bring them down.”

Posted on 16 October '09 by Douglas, under Uncategorized.

4 Comments to “Greenspan Finally Agrees with Rushkoff!”

#1 Posted by mason (16.10.09 at 22:08 )

Send my regards and information on Dick Cheney’s Δ in earning for 2009 or for that matter the shrub’s. From a little nut a mighty retirement doth grow. More money for pretzels, beer and brush-cutting implements. Yippie!

But seriously, it’s good to hear.

-mason

#2 Posted by Phil (18.10.09 at 17:01 )

I’m a little creeped out by this admission. A man like Greenspan admitting that his philosophical foundations might not be as solid as once percieved? Did someone put a voodoo curse on this man?

#3 Posted by mason (18.10.09 at 21:36 )

It *is* truly odd or at least a very rare thing that has happened Phil. Greenspan spent his whole life prostrating himself before a certain view of the market. That the curse now and again appears lifted is the fascinating thing! He still flails about in old thinking, remembering Standard Oil, for heaven’s sake! It’s no wonder the market did fine after Standard was broken. The government just engineered an even more oil and automobile based economy……and foreign policy.

This is the frustrating part for all of us and Douglas included. There are a number of knobs on this devise maintained and operated by different agencies. This gives us the appearances of free markets and a modicum of market controls. But when a whole generation of like-minded theorists are at the controls it suddenly seems as if there are far too few agencies.

If we can’t or are unwilling to change the modes of governance at the top we have to elect different lives for ourselves: lives of different scale. This does not mean we can not still seek to change government. It may be easier for some to choose a different life than it is to know all we must know about about who are leaders are and where they come from.

“Hi, I’m Fred, I have a bank. You got $1500? …ahhh, I’ll put here…in my white suit.” -Steve Martin

Funny image tho of Allan Greenspan playing a banjo with an arrow thru his head.

-mason

#4 Posted by John R. Sedivy (08.02.10 at 17:20 )

Doug – I find two aspects of this article most interesting – first the idea of the larger banks existing on an “implicit subsidy.” I had never thought about it that way, but it does make sense. Some time ago I had read American Lion which is a biography of Andrew Jackson. Although Jackson accomplished quite a bit – to include elimination of the federal debt – he could not overcome the central bank.

Another interesting point was the part about the individual pieces being more valuable than the whole. In general when considering systems theory an optimal system as a whole EXCEEDS the performance of it individual pieces or otherwise stated – the system is greater than the sum of its parts. Having read many of your books I realize you probably already know this given your discussions on systems theory and the media but thought it was worth stating nonetheless.

Thanks for the useful insights!