Eric Rosengren, President of the Federal Reserve Bank of Boston talks about the preventative financial measures that must have to be taken so financial markets can run efficiently without causing risk to the economy. (0:20)
By Michael Combier-Talk Radio News Service
Billions of dollars used in the federal bailout of financial institutions was a mistake,said Former Federal Reserve Chairman Alan Greenspan today in D.C. Speaking at the American Enterprise Institute, Greenspan said that the ‘Too Big To Fail’ doctrine used by the Bush and Obama Administrations was seriously flawed.
“Earlier this decade,” said Greenspan, “it was widely expected that the next crisis would be triggered by the large and persistent US current-account deficit precipitating a collapse of the US dollar. The dollar accordingly came under heavy selling pressure” when the euro-dollar exchange rate rose starting in spring 2003.
“A financial crisis is characterized, in fact defined by an abrupt, discontinuous break in asset prices. But discontinuities are, of necessity, a surprise and that requires that the crisis be largely unanticipated by market participants. For, were it otherwise, financial arbiters would have diverted it,” said Greenspan.
In March, in light of the failure of Lehman Brothers and the rescue of AIG, Treasury Secretary Timothy Geithner proposed a plan to set a systemic regulator which would oversee the entire financial system and would prevent certain banks and nonbank financial firms to collapse financially. The plan would give the authority to the Federal Deposit Insurance Corporation the authority to bail out or liquidate failing banks or firms.
Greenspan said that “it is one thing to identify firms whose collapse might severely impair financial intermediation; it is quite another to identify institutions whose failure will lead to systemic breakdown. Systemic risk is readily identifiable. Potential systemic failure is not,” he said.
For Greenspan, the role of shareholders is important to explain the current financial crisis. “In Capitalist societies, we need shareholders to govern,” said Greenspan. “But their perspective has become increasingly that of investors, not owner-managers. When dissatisfied with corporate performance, they tend to sell their shares rather than seek to change management.”
“Of all the regulatory challenges that have emerged out of this crisis,” Greenspan views “the ‘too big to fail’ problem and its precedents, now fresh in everyone’s mind, is the most threatening to market efficiency and our economic future.”
Why did you bail out Bear Stearns? It was the resounding question heard over and over in the Senate Banking, Housing, and Urban Affairs Committee hearing on “Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators.” Federal Reserve Chairman Ben Bernanke, SEC Chairman Christopher Cox, United States Treasury Under Secretary Robert Steel, and President of the Federal Reserve Bank of New York Timothy F. Geithner, all attempted to answer that question to Congress. (more…)
