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Greenspan: Break Up the Big Banks, It Will Be Good for the Economy

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DejaVu
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« on: October 16, 2009, 12:18:30 am »

Thursday, October 15, 2009
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.

Source: http://georgewashington2.blogspot.com/2009/10/greenspan-says-break-up-large-banks.html#comments


Real nice of Greenspan to suddenly decide to speak the truth!
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The most successful tyranny is not the one that uses force to assure uniformity, but the one that removes awareness of other possibilities, that makes it seem inconceivable that other ways are viable, that removes the sense that there is an outside. --Allan Bloom

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Terry
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« Reply #1 on: October 16, 2009, 07:39:58 am »

"Real nice of Greenspan to suddenly decide to speak the truth!" - DJ

Actually, that may be a first for him.  Greenspan was part of the problem that led us to where we are today.  He always had a way of speaking in terms that no one could understand.  Now, it seems that he's found religion.  Suggest that he go back to doing what he does best:  NOTHING.
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