Greenspan: Fed Is Not A Magic "Piggy Bank"

Former Federal Reserve Chairman Worries Over Government Bailouts Of Collapsed Companies

(AP)  Troubled by the Bear Stearns debacle, former Federal Reserve Chairman Alan Greenspan is advocating a new way of dealing with government bailouts of companies whose sudden collapse could wreak havoc on the country's economic and financial stability.

Greenspan says Congress needs to give the government new powers to handle troubled companies to minimize any potential losses to American taxpayers. A self-described libertarian Republican, Greenspan has a reputation for being wary of giving the government extra powers. However, in crisis situations, there needs to be a clear process for handling bailouts, rather than depending on the Fed to do so, he reckons.

A high-level panel of financial officials should be given broad authority to quickly determine whether a failing company poses a sufficient threat to the entire U.S. economy, he recommends. If so, the company would be shut down.

"We need laws that specify and limit the conditions for bailouts - laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than circuitously through the central bank as was done during the blowup of Bear Stearns," Greenspan wrote in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World." (The paperback will be released Sept. 9; the hardcover came out last year.)

Greenspan envisions the formation of a group akin to the Resolution Trust Corp. to step in, take a troubled company into conservatorship, wipe out the equity, impose some charge or "haircut" on its debts before guaranteeing them and then selling its assets. The RTC was created in 1989 to deal with the aftermath of the savings and loan crisis. It disposed of the assets of failed savings and loans and then went out of business.

Costs to taxpayers would still be a concern, he acknowledges. As with the RTC, however, the public cost could be minimized, he says.

Critics in Congress, in academia and elsewhere worry that the Fed's unprecedented actions - including financial backing in March for JPMorgan Chase & Co.'s takeover of Bear Stearns Cos. - are putting taxpayers on the hook for billions of dollars of potential losses. They also say it encourages "moral hazard," that is, allowing financial companies to gamble more recklessly in the future.

Fed Chairman Ben Bernanke, who took the helm after Greenspan, has repeatedly defended the Fed's actions, saying they were necessary to avert a meltdown of the entire financial system, which would have devastated the U.S. economy.

Bernanke's Fed also has taken a number of unconventional - and some controversial - actions to shore up the shaky financial system and to get credit, the economy's lifeblood, flowing more freely. It agreed in March to let investment houses draw emergency loans directly from the central bank. And, in July, the Fed said Fannie Mae and Freddie Mac also could tap the program. For years, such lending privileges were extended only to commercial banks, which are subject to stricter regulatory supervision.

Greenspan, 82, who ran the Fed for 18 1/2 years and was the second-longest serving chief, says he is concerned that Capitol Hill will look to the Fed's actions "as a wondrous new font of seemingly costless federal funding - a magical piggy bank."

The United States has long "abandoned the notion that we should leave crises to be resolved solely by the marketplace," Greenspan says in making the case for new powers in this area.

The ex-Fed chief says he is skeptical of a sweeping plan, put forward by Treasury Secretary Henry Paulson, that would turn the Fed into a uber cop of sorts - responsible for policing financial market stability. "Much as we might wish otherwise, policymakers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances," Greenspan says.

Greenspan calls the current crisis "one of those rare, once in a century or half-century events." The full closure on this crisis is "a way off," he says. The U.S. economy, he observes, appears to be "on the brink of recession." And, worldwide inflation, he warns, is creeping, which will pose a challenge to central bankers, he says.

Looking back, Greenspan says governments and central banks probably could not have altered the course of the once high-flying housing market and broken through investors' fevered euphoria.

He believes that the government should have gone after fraudulent mortgage practices, however. "Bank regulators, who are expert in accounting, banking law and risk management, are not equipped for this job," he says. "It requires law-enforcement professionals."

Greenspan has taken much criticism for failing to crack down on dubious lending practices that eventually came to roost with the subprime meltdown and for failing to act as a forceful banking regulator. He also has been blamed for keeping interest rates too low for too long, feeding the housing bubble.

The epilogue can be purchased separately for $8 as an electronic, or "e-text," the first such release under a program from publisher Penguin Group (USA). "We know that many who read the hardcover or e-books edition ... would be interested in the new material written by Dr. Greenspan without having to buy the whole book again," says John Fagan, Penguin's marketing director for e-books.

[payasyougo]

"Like the bank robber answered when asked why he robbed banks : "because that''''s where the money is". You tax the rich because they have it."
----
I believe we''ve all just witnessed someone finally admitting to robbing the rich via taxes.

[cfin5]

That''s right, it''s not a magic "Piggy Bank". It''s a "FIAT" Piggy Bank. So don''t blame us for the problems that those whom you have to do with have created through covetousness.

[hypnotoad72]

The Fed certainly seems to be a magic piggy bank for Wall St firms, hedge funds and large banks who get in trouble!

Why can''''t it be for the average American?

Posted by gce65
----


Because we pay the most in taxes? (percentage-wise, corporations pay in the lower-30s, but there aren''t 250 million corporations in existence.)

[greeneyes222]

It''s a reasonable solution. As it stands now, these firms get the money and go on their merry way.

[walterburien]

LOOK FROM THE INSIDE!

The Federal Reserve''s: Annual Financial Report
See the wealth, see the Players!

http://cafr1.com/STATES/FedReserve/FR2007CAFR.pdf

Learn!

[walterburien]

LOOK FROM THE INSIDE!

The Federal Reserve''s: Annual Financial Report
See the wealth, see the Players!

http://cafr1.com/STATES/FedReserve/FR2007CAFR.pdf

Learn!

[wl7bzh]

If I counterfeit, I go to jail. The Fed does it, calls it deficit spending and some politician gets elected.

Gosh, I look the government''s "team player" approach to economics.

[grandesign]

In 1952, the tax rate for the wealthy was something like 88%. These days it''''s 30%.
Posted by hypnotoad72 at 01:41 PM : Sep 05, 2008

Gosh, and so many Conservatives harken back to the good ''ol days of the ''50s. Maybe no one was really wealthy back then.

[vechibless]

'' .. i like how people ''won''t give you the time of day'' unless you at least try to look and act like a starving slaving tortured mangled raped baked african war baby, but i do think they are being a tiny bit over zealous and cruel by leaving so many other alternatives ''out of the loop'' .. ''

[hermitdave]

Since Alan was asleep at the switch as the housing bubble got bigger and bigger, his advice is only as good as any other crook connected to this band of criminals we call our government. Bush will do like any spoiled rich kid he will just borrow more money from his new Chinese dad.

[magoo2u1]

Hey morons : You can''t collect taxes from the unemployed. Like the bank robber answered when asked why he robbed banks : "because that''s where the money is". You tax the rich because they have it. Their corporations aren''t taxed so hit them up for their fair share.

[tylenol6]

Greenspan = NEW WORLD ORDER

[gce65]

The Fed certainly seems to be a magic piggy bank for Wall St firms, hedge funds and large banks who get in trouble!

Why can''t it be for the average American?

[hologram5]

Give the government MORE power? What kind of crack are you smokin fool? They keep taking and taking without giving back. Give them more? I think not.

[bcadrew]

I know someone who bought a half million dollar home on stated income. The problem is he did not have any real income and he was helped in stating his income by an unscrupulous lender. The lender made a lot of money and helped this person get a second mortgage on the property so everyone got paid. However I am sure we the tax payer will be bailing both of these loans out. It is amazing that if I take a gun into a bank and rob it I go to prison, but if I wear a suit into a bank and rob it the tax payers will help me!

[freeyourcrt-2009]

They print money on a whim and convince most people that declaring its value by fiat makes it worth something . If that''s not magic then what is?

[freeyourcrt-2009]

They print money on a whim and convince most people that declaring its value by fiat makes it worth something . If that''s not magic then what is?

[random_radar]

When poor people make a bad investment, the rich foreclose and repossess their property.

When rich people make a bad investment, poor people have to pay taxes to bail them out.

Thus we see how the rich get richer and the poor get poorer.

How much dumber can poor people get than to believe that politicians tax the rich? Politicians tax the poor to pay for the rich.

[antoniof123]

If Greenspan is worried then we all should be he was one of the best despite what you clowns may think. Now we should be looking to cover ourselves thank you GOP for your lack of oversight once again.

[jmurrieta1]

Although it''s helped a lot of rich pigs.