Greenspan Says U.S. Should Consider Breaking Up Large Banks

by Ben Hoffman

Oct. 15 (Bloomberg) — 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.”

‘Really Arbitrarily’

The former Fed chairman said while “just really arbitrarily breaking down organizations into various different sizes” goes against his philosophical leanings, something must be done to solve the too-big-to-fail issue.

“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.”

Source

I’ve been saying that for months! The government also needs to break up the huge media conglomerates. Come on, Obama. Earn your Nobel Prize! Bust some trusts!

13 Comments to “Greenspan Says U.S. Should Consider Breaking Up Large Banks”

  1. That isn’t going to happen. Obama has already proved that. Besides, he is too busy looking in the mirror and preparing for his next television appearance.

    Don’t you think it’s a little late for Alan Greenspan to be having these sorts of sentiments?

    • Greenspan has admitted that his world-view was wrong. It seems he’s now rethinking all of his policies.

      • Agreed, and who better to make the case, huh, than a reformed free marketeer. Although, what he’s proposing isn’t so much about increasing regulation as it is increasing competition. However, to get there we need a strong referee (the government) to level the playing field. This is what Obama says he wants. Let’s see if he actually does it.

        At any rate, welcome to the world of sane and stable market Capitalism, Mr. Greenspan. Too bad it took the near-collapse of the world economy to convince you. Would have been nice if you’d listen to Brooksley Born.

  2. Wasn’t Greenspan appointed by Ronald Reagan?

  3. You fail to acknowledge the implicit problem. It isn’t that banks become too big and therefore should be broken up. It’s that the government can’t resist stepping in to bail them out. If the corporation actually felt that they would fail if they failed–they wouldn’t take the risks Mr. Greenspan is referring to.

    • The failure of Lehman Brothers disproves your theory.

      • The failure of Lehman Brothers disproves your theory.

        And that same failure somehow proves your theory? So which is it? Do we have a system that allows big banks to fail or do we have a system where the government allows them to fail? I tend to say that our government officials [all of ’em. Dubya and The Chairman] want to get re=elected or remembered well and try to do too much. That’s why we bailed out the banks and why Obama bailed out the cars.

      • A big part of the problem is the tax structure. B.R. (before Reagan), income of over 3 million dollars a year was taxed at a rate of 70%. That took away incentive for short term gains and instead, the profits went back into companies. Now, all that matters is a short blip on the stock charts and CEO rake in the profits.

        But back to the “too big to fail” issue. There used to be laws on the books (before Reagan) to prevent these companies from getting so big. Clinton was responsible for the deregulation that resulted in the giant media conglomerates, but that’s another issue.

  4. There used to be laws on the books (before Reagan) to prevent these companies from getting so big.

    Why? What benefit do you think these companies have that being “too big” gives them?

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