Daniel Roe
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Poster: Daniel Roe @ Sat Sep 06, 2008 1:28 pm
Critics in Congress, in academia and elsewhere worry that the Fed's unprecedented actions - including financial backing in March for JPMorgan Chase & Co.'s takeover of Bear Stearns Cos. - are putting taxpayers on the hook for billions of dollars of potential losses. They also say it encourages "moral hazard," that is, allowing financial companies to gamble more recklessly in the future.
In Greenspan's latest book, he takes a swipe at some of the bailouts of the US banks.
Greenspan, 82, who ran the Fed for 18 1/2 years and was the second-longest serving chief, says he is concerned that Capitol Hill will look to the Fed's actions "as a wondrous new font of seemingly costless federal funding - a magical piggy bank."
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The ex-Fed chief says he is skeptical of a sweeping plan, put forward by Treasury Secretary Henry Paulson, that would turn the Fed into a uber cop of sorts - responsible for policing financial market stability. "Much as we might wish otherwise, policymakers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances," Greenspan says.
He, unfortunately, is somewhat in favor of bailouts in some "extreme" circumstances, however he disagrees with the Bear Stearns bailout and how it was done.
The United States has long "abandoned the notion that we should leave crises to be resolved solely by the marketplace," Greenspan says in making the case for new powers in this area.
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"We need laws that specify and limit the conditions for bailouts - laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than circuitously through the central bank as was done during the blowup of Bear Stearns," Greenspan wrote in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World." (The paperback will be released Sept. 9; the hardcover came out last year.)
However, the bailouts Greenspan has in mind are not without a catch, which is a far cry from the airline bailouts of 2001 et al.
Greenspan envisions the formation of a group akin to the Resolution Trust Corp. to step in, take a troubled company into conservatorship, wipe out the equity, impose some charge or "haircut" on its debts before guaranteeing them and then selling its assets.
So if Greenspan had his way, certain institutions would be allowed/forced to die, but under the parachute of the treasury so as to limit foreseen market panic. This is not quite the monetorist love song we've all come to love in Greenspan's musings. Obviously politically hard-wired institutions would still be selected for federal assistance before others, but it's still a heck of a lot more in the spirit of laissez faire than throwing a bucket of money at a failing corporation that needs to die.
Italic quotes from this article by AP.
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