Former Fed Chief Alan Greenspan Comes Out Strongly Against Bank Bailouts Saying System Should Be Restructured Based On Behavioral Science

Thursday, October 25, 2012 18:49
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Former Fed Chief Alan Greenspan Comes Out Strongly Against Bank Bailouts Saying System Should Be Restructured Based On Behavioral Science

Tags: banks | Dodd-Frank | Federal Reserve

Former Fed chief Alan Greenspan recently used the annual conference of SIFMA to express views he could not express strongly during his Fed tenure.

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Greenspan said bailing banks out during the 2008 crisis was a mistake and that banks should have been made to go through Chapter 11 reorganization if they were in trouble.
 
He said the Dodd-Frank legislation essentially exists to restrain competition and that it would be impossible to enact all 2300 pages of the law.
 
The economy needs to be able to move society’s savings into profitable investment in cutting-edge technologies.
 
But if a bank is overextended and becomes supported by the monetary system of a central bank, abnormally low capital results in the banking system because there is no incentive to follow the golden rule.
 
This has happened on a global basis and can be seen in multiple distressed countries in Europe.
 
Banks get overextended, have no lender of last resort, and become inefficient.
 
Greenspan is a proponent of behavioral economics and says the economic system needs to be reconstructed based on how people do things. Fear and euphoria are fundamental components of human nature.
 
He said the human beings running the Federal Reserve, the International Monetary Fund, and JPMorgan Chase & Co. all missed the signs of impending disaster in 2008. A key element of a financial crisis is that very few people expect it.

 

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