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Tuesday, February 17, 2009

Greenspan's Updated Doctrine

I think Alan Greenspan deserves some credit for reexamining and changing his beliefs about the need to regulate financial markets:

Greenspan vs. the Greenspan Doctrine, by Jon Hilsenrath, RTE: The Greenspan Doctrine – a view that modern, technologically advanced financial markets are best left to police themselves – has an increasingly vocal detractor. His name is Alan Greenspan.

As Fed chairman, Mr. Greenspan was a frequent opponent of market regulation. ... But the humbled retired chairman has had to revise his views. In comments ... late Tuesday, the retired Fed chairman took a new swipe at the market’s self-correcting tendencies and bowed his head to a new period of increased regulation.

“All of the sophisticated mathematics and computer wizardry essentially rested on one central premise: that enlightened self interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring and managing their firms’ capital and risk positions,” the Fed chairman said. The premise failed in the summer of 2007, he said, leaving him “deeply dismayed.”

Self-regulation is still a first-line of defense, Mr. Greenspan said. But after the financial collapse of 2007 and 2008, “I see no alternative to a set of heightened federal regulatory rules of behavior for banks and other financial institutions.” ...

And, on nationalization, he's aboard:

Greenspan backs bank nationalisation, by Krishna Guha and Edward Luce, FT:  US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan ... has told the Financial Times.

In an interview ... Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation. ...

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt - bonds that would be paid off before other claims - might have to be protected... ”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.” ...

    Posted by on Tuesday, February 17, 2009 at 03:33 PM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (26)


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