The Warring States of NPF - "Too big to fail is too big"

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"Too big to fail is too big"

So says... Alan Greenspan?!

Greenspan Says U.S. Should Consider Breaking Up Large Banks
By Michael McKee and Scott Lanman

Quote:

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.�

�Really Arbitrarily�

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.�

I find this kind of shocking and also annoying in that it would have been nice if he'd come across this opinion during the literally decades over which he exercised actually enormous power over the national banking system.

Also his point about the implicit subsidy and its anticompetitive implications is I think a really important one.

Well, better late than never, I guess. If they can't fix it this time around, at least there won't be a next.

Very good insight.

it's not often you can reply to such a verbose article with "well, duh."

Really I don't see why we didn't break them up sooner. Big Oil went down like a house of cards and that one phone company has been trying to put itself back together again for the last fourty or so years.

If Alan fuckin' Greenspan has finally said "Hey, you know what? The banks are too big."

Then guess what.

The Banks are too Big.

If the dems have any balls we'll finally get some new antitrust laws, something that has been lacking in America for a long time.

Quote:

Originally Posted by Fifthfiend (Post 979114)

Well to be fair, he jacked up interest rates in the 90's to make sure banks wouldn't get 'too big', so it's not like he had his entire multi-term political life to notice a developing problem, since it wasn't prominent back then. However, 9/11 boned the economy (shutting down all air travel can do that), and he overcompensated over the last of his years by tanking the interest rate. It's a shame he wasn't around long enough to fix his overcompensation, as he did manage to forsee the recession before just about anyone else.

Where's Teddy Roosevelt when you need him?

Quote:

Originally Posted by Wigmund (Post 979192)

Where's Teddy Roosevelt when you need him?

Didn't you hear my story?

I agree with every word. Except "moribund" and "obsolescent". Those are just crazy talk.

Quote:

Originally Posted by Whomper (Post 979149)

Apart from the fact that this recession was predicted in the mid 90s and so yeah it was prominent back there.
And the problems that caused it was predicted in the 1870s.