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Saturday, August 09, 2008

Greenspan: New Government Panel Needed to Manage Bailouts

Alan Greenspan says we need to form a new panel of financial officials with the "power to seize any financial institution whose failure threatens the entire economy, bail out its creditors and close it down." I don't have any objection to formalizing the procedures used in cases such as Bear Stearns and setting limits on taxpayer exposure to losses, but I don't think we need a whole new "standby panel" to manage these cases:

Hire the A-Team: From Mr T to Mr G, The Economist: A Lifelong libertarian, Alan Greenspan does not ordinarily advocate giving the government more power. But he does so in a new epilogue to the paperback edition of his memoir, parts of which were made available to The Economist. ...

Mr Greenspan says a high-level panel of American financial officials should be given broad power to seize any financial institution whose failure threatens the entire economy, bail out its creditors and close it down. “We need laws that specify and limit the conditions for bail-outs” and do so transparently with taxpayers’ money, “rather than circuitously through the central bank, as was done during the blow-up of Bear Stearns,” he writes...

If that means the government has to wade in, so be it. “Our country has long since abandoned the notion that we should leave crises to be resolved solely by the marketplace,” he says. “The critical need…is to formalise…the procedures improvised in the case of Bear Stearns. This should ensure that in the future, government financial assistance to lending institutions does not impact the Federal Reserve’s balance-sheet and monetary policy.”

He says a standby panel, empowered by Congress, should determine if an institution’s failure is dangerous enough to require taxpayer support. It would then form a vehicle to take the firm into “conservatorship”, wipe out the equity, preferably impose a “haircut” on its debts before guaranteeing them, and then sell its assets. Mr Greenspan’s model is the Resolution Trust Corporation (on whose board he served), created in 1989 to take over failing thrifts, sell their assets, then close itself down. He pours cold water on a proposal by Hank Paulson, America’s treasury secretary, to give the Fed broad responsibility over market stability.

Mr Greenspan’s proposal may be politically difficult. ... And the Fed is not yet ready to bow out. “Unless I hear from Congress that I should not be responding to a crisis situation, I think that it’s a long-standing role of the central bank to use its lender-of-last-resort facilities,” Ben Bernanke ... said last month.

    Posted by on Saturday, August 9, 2008 at 02:43 AM in Economics, Financial System, Monetary Policy, Regulation | Permalink  TrackBack (0)  Comments (20)

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