Greenspan: Break Up the Big Banks, It Will Be Good for the Economy, Minor Regulation Won’t Work

Alan Greenspan has joined the long and distinguished list of experts calling to break up the too big to fails.

As Bloomberg writes today:

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”…

“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.”

In invoking the break up of Standard Oil, Greenspan is invoking Teddy Roosevelt’s trust-busting actions. See this.

Greenspan also lends credence to those calling for using antitrust laws to break up the too big to fails.

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  • http://Anonymousnoreply@blogger.com Anonymous

    That's nice Alan. Thanks since you were or are part of the problem.Now onto the Fed.

  • http://Anonymousnoreply@blogger.com Anonymous

    Right thing to say, but in shock that it was The Maestro who said it.

  • http://Anonymousnoreply@blogger.com Anonymous

    Now I've lived to hear everything. Mr. Bubbles admits too big to fail has been a disaster. What next, a mea culpa on structured finance? A "sorry" from the Free Market crowd for deregulation? Let's not stop at too big to fail when these corps are also too big to prosecute. Any corporation in a public utility business like banking should have to agree that they will not be too lawyered up to be prosecuted. Instead of Corporate Integrity Agreements CIAs) we need Corporate Regulation Agreements for Prosecution (CRAPs).

  • http://www.blogger.com/profile/03434138180656049808 Ron

    It seems like the Canadian banks have come through this debacle a lot better than their American counterparts. Why not make the banks to back to banking. If they want to screw around in risky investments, let them do it through small boutique type operations?ronDhttp://www.start-a-business-faq.com

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