The former chair of the Federal Reserve, Alan Greenspan, argued on Thursday that the government has lost credibility on economic matters and is largely to blame for allowing the nation's biggest banks to become "too big to fail."
Speaking at the American Enterprise Institute, the man once known as "the Maestro" offered a sharp critique of policies that have essentially guaranteed the liabilities of major financial and housing market institutions. Looking to the future, he warned, the government has effectively created a "highly disturbing" market paradigm where similar institutions would operate under the belief that they, too, have a safety net.
"Of all the regulatory challenges that have emerged out of this crisis," Greenspan said, "I view the [Too Big To Fail] problem and the TBTF precedents, now fresh in everyone's mind, as the most threatening to market efficiency and our economic future."
In an expansive address about the current economic and regulatory landscape, Greenspan argued that there is little the government can do now to rectify this error, other than pass a constitutional amendment to prevent future bailouts. Short of that, he said, the government has "lost very considerable credibility."
"The market says, 'we don't believe you. [You] gave a credit to Fannie and Freddie on the expectation that in the event of a crisis they would be bailed out,'" Greenspan said. "Having lost that credibility with respect to Fannie and Freddie I don't think you could pass that legislation today, which would essentially say that the government can not bail out financial institutions."
"I wish there were [easy solution to this]," he added. "There are some questions which do not have easy answer and that is why I am so terribly disturbed by this whole too-big-to-fail issue, because if it continues to function it will disable our financial system."
But if Greenspan considered the bailout of large financial institutions a problematic economic development, he was also troubled by the process by which these institutions got to this point. As Chairman of the Fed, he said he would testify at the Capitol that Fannie and Freddie were not "too big to fail" only to watch Congress treat them as such. In a October 1999 speech before the American Bankers Association, Greenspan said that he warned that the nation "face[d] the reality that the megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail.''
That said, Greenspan's tenure at the Fed remains defined by some of the very features that are now considered, at least in part, behind the current crisis. He was a cheerleader for the market even as it grew structurally less secure. And while he may have warned that Fannie and Freddie were at risk, Greenspan championed stripping down the broader regulatory structures of the financial system. Indeed the economy that he helped create over the course of several decades became personified, in large part, by the growth of the unwieldy and unstable institutions that he currently laments.
For example, in that same October 1999 speech, Greenspan argued against a "one-size-fits-all approach to regulation" of the banking industry, saying that he preferred a "program that is the least intrusive, most market based, and most consistent with current and future sound risk-management practices possible."
On Thursday, meanwhile, he continued to air and even elaborated upon that long-standing skepticism, saying that a return to more regulation would hamper America's economic recovery.
"To compete successfully in the global marketplace requires that the domestic market itself be highly competitive," he said in his prepared remarks. "Heavy regulation and a thwarting of 'creative destruction' undermine that capability."
Later, in his question-and-answer session, Greenspan claimed that even if a new regulative system were put in place, it would be inherently reactive and unreliable in deterring future crises.
Here is a copy of Greenspan's remarks:
Greenspan - Speech -final -
"The regulation that has failed is that part of regulation that requires the regulator to forecast the future," he told the largely conservative audience. "The notion that you can actually forecast when the crisis cracks is without any evidence... Forecasters as a group will almost certainly miss the onset of the next financial crisis as they have in the past."