6 ms·

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

50 points by Flemlord 17y ago

Flemlord 17y ago
Agreed. If it's too big to fail, it's to big to exist.
- andre 17y ago
  2nd that
- anamax 17y ago
  And the truth of that statement is not bank-specific. For example, it applies to financial regulators and even govts....
  - redcap 17y ago
    You really want governments to start failing? I mean California is getting close, but that's mostly because it hamstrung itself early on by allowing citizens to promote legislation. While there are a few governments that I would like to be changed (Chinese Democracy anyone), the general trend towards democracy and liberty has been a good thing. If saw a govt does get too big to fail, having it fail could well lead to chaos or a dictatorship. I know there is a lot of whinging by Republicans in the US about 'small' government, but really you're not going to get decent change in your country overall unless the federal government acts as the states aren't up to it (seatbelt laws anyone?)
    - ams6110 17y ago
      I think in the case of governments it's not that they can be too big to fail, it's that if they get too big, they do fail. Though maybe that's the general case, now that I think about it. edit s/its/it\'s/g
    - dangoldin 17y ago
      At the same time the bigger the government the less change the country will have since most of the resources will be used by people in government to maintain the status quo.
    - cvg 17y ago
      I don't think Anamax is saying that he wants appropriate governments to fail, but rather that ginormous governments should be split as well. If a country's failure leads to chaos, perhaps the size of that government should be rethought. We should step back and realize that a government isn't some sacred perpetual institution but rather a means to represent people. If a government fails to represent it's people, it must be changed.
      - anamax 17y ago
        I thought that that's what I wrote. Thanks.
    - shpxnvz 17y ago
      really you're not going to get decent change in your country overall unless the federal government acts as the states aren't up to it (seatbelt laws anyone?) The point is that in the U.S. the Federal Government was, by design, to be limited in the powers it could exert over the states and citizens. I think the argument from those who are for "small government" is not that change such as seatbelt laws are bad or unwanted, but that the cost of and danger in relinquishing to the Federal Government the power to make those decisions is far, far greater.
- dantheman 17y ago
  There is no too big to fail, that is just a ploy to convince you to not be angry at your money being given to them. Sure if they failed it would be bad, but it's going to be bad anyway. All we are doing is prolonging and exacerbating the pain.
- mbrubeck 17y ago
  Splitting up the banks won't eliminate the "too big to fail" problem. If a systemic crash (like the one last year) causes hundreds of smaller banks to fail, there will be just as much pressure to bail them out as if one giant bank fails.
  - MaysonL 17y ago
    99 have already failed this year, and probably 2 or 3 hundred more will fail before this crisis is over, and their depositors have been bailed out - their stockholders and management haven't, unlike the big guys.
pelle 17y ago
Isn't it better to just let them fail next time instead. That would force the big banks to split up themselves.
- deleted 17y ago
  [deleted]
- falsestprophet 17y ago
  We need new legislation to provide for a quick route out of bankruptcy for these financial institutions. Regulators should be able to declare a bank insolvent then -- overnight -- wipe out shareholder equity, convert debt and top up tier 1 capital. For these institutions, a bankruptcy plan should be required like a fire escape plan is required.
  - jeromec 17y ago
    No, I think bankruptcy is little better than failure unless the gov. will pump in funds as well. Take AIG for instance, which backs debt at various levels. Clearing the books of that juggernaut would still send ripples through the system, likely freeze up credit markets, and wreak stock market havoc. I think Greenspan is right about breaking up such institutions.
    - falsestprophet 17y ago
      No, I think bankruptcy is little better than failure unless the gov. will pump in funds as well. That is what topping up tier 1 capital is about. The bankrupt bank may end up being temporarily partially or wholly owned by the government. Clearing the books of that juggernaut would still send ripples through the system, likely freeze up credit markets, and wreak stock market havoc. I think Greenspan is right about breaking up such institutions. I suspect you would then have 100 bankrupt companies instead of one. More careful derivatives regulation is obviously prudent, specifically there really ought to be ring-fenced capital backing up derivative instruments (like is required for proper insurance).
      - 17y ago
hristov 17y ago
Now he starts having ideas. I did not hear him make a peep when the largest and most problematic of these banks (Citigroup) was created and when they had to have a complete overhaul of the nations banking laws to create that particular bank. No, he actively supported the new laws intended to create citigroup and which also resulted in another bunch of oversized financial institutions including AIG. And later he guaranteed bank profits by lowering interest rates whenever banks were in just a little bit of trouble. The inevitable result was an asset bubble and rates so low that when we had an actual crisis, the fed could not do anything. But now, when he is out of power, he finally figures out that the existence of banks that are so large and powerful that they can get the government to ensure their profitability might not be good for the free market after all. Good job!
- unalone 17y ago
  He did apologize profusely and say that his beliefs had been proven irrevocably wrong. I'm willing to cut the guy some slack, even if he did fuck up on a level most people aren't allowed to fuck up on.
  - deleted 17y ago
    [deleted]
  - fnid 17y ago
    where did he apologize? Link?
  - sown 17y ago
    He never really apologized This blog sums it up: http://greenewable.wordpress.com/2008/10/23/greenspan-about-as-close-to-an-apology-as-well-probably-get/ http://greenewable.wordpress.com/2008/10/23/greenspan-about-... and http://sanders.senate.gov/newsroom/news/?id=bc863544-b90f-4eda-bafb-ecd9ae0f77ef http://sanders.senate.gov/newsroom/news/?id=bc863544-b90f-4e...
- pg 17y ago
  Better to admit his mistakes than never to. Nearly all government officials make mistakes. What fraction admit them? Whatever minuscule n% do, he's in the (100-n)th percentile.
jeromec 17y ago
Wow, Greenspan just won a bunch of points in my book. > 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. I have the same sentiments. > “Failure is an integral part, a necessary part of a market system,” I agree. > “If you start focusing on those who should be shrinking, it undermines growing standards of living and can even bring them down.” I think his proposal is one we should act on.
- mcantelon 17y ago
  That's kind of like an airplane pilot getting drunk and crashing a plane, killing hundreds, then saying publicly that pilots shouldn't be allowed to drink.
  - roundsquare 17y ago
    Although, to make the analogy complete, you have to start with the assumption that people didn't know airline pilots shouldn't be drunk while flying. It seems obvious in hindsight but at the very least, this pilot thought drinking on the job was ok.
    - mcantelon 17y ago
      Pretty much every bubble in modern financial history, including the great depression, resulted from easy credit with nothing behind it.
jorgem 17y ago
The problem is that they will be broken up "poorly". The bigwigs will keep the good parts, and give the crappy, debt-ridden parts to the government, or let them fail. Kinda like GM (although I'm not sure there were any good parts).
- gaius 17y ago
  This is exactly what Northern Rock did in the UK. http://www.independent.co.uk/news/business/news/plans-for-northern-rock-to-split-into-a-good-and-a-bad-bank-1802781.html http://www.independent.co.uk/news/business/news/plans-for-no... Compared to Gordon Brown, Greenspan is an economic genius.
- tmsh 17y ago
  Another problem is that a former Fed chairman should know how to break up the banks instead of simply saying 'break up the banks'. There's already a clearly defined line in which to break up each bank. It's called the Chinese wall. http://en.wikipedia.org/wiki/Chinese_wall#Finance http://en.wikipedia.org/wiki/Chinese_wall#Finance However, by converting the major investment banks to bank holding companies, Paulson basically got rid of this division. There should be risk-taking investment sides of large investment firms which do not have the luxury of being bailed out (i.e., people who trade CDSs, etc.), but equally there should be large commercial banks that form the backbone of our financial industry and provide the largest channels of liquidity. And these two sides of the company (buy side and sell side) should always be separate companies. But obviously there need to be people with actual investment banking experience or who know enough of how the industry works, but also have an interest (which to most financiers would appear highly irrational) in fairness for the general public. Such people just don't exist yet. Hopefully in the future they will tho. Anyhoo.
  - roundsquare 17y ago
    I respectfully disagree with using the Chinese Wall (only a little bit though). Seems like it would work in general, but I believe there are groups that sit on top of the Chinese Wall. Stil, its a reasonably good place to start.
deleted 17y ago
[deleted]
ironsam 17y ago
"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." I like how the answer for meddling that causes problems is more meddling that is going to cause other problems. Maybe we shouldn't be listening to the major player who screwed our monetary policy for 20 years.
3pt14159 17y ago
Every time I hear or read what Greenspan says I become more and more convinced that his goal is to bring down the system ala Atlas Shrugged style. These are not the words of an objectivist, they are the words of a statist. Or, at very best, an extremely pragmatic capitalist. Dude is trying to bring down the whole Money as Debt and Corporatism system in on swoop. Note to the strikers: Bring me with you.
- philwelch 17y ago
  While it's true that Greenspan was a close associate of Ayn Rand for years, it rises to the level of conspiracy theory to suppose that Atlas Shrugged was meant as some sort of blueprint for real world action crafted in the 1950's and slowly implemented over time by Rand's associates. Right up there with the theory that Rand is a member of the Illuminati and Atlas Shrugged is the Illuminati game-plan to take over the world.
ComputerGuru 17y ago
Honestly, I'm more than happy with my bank (JP Morgan/Chase) staying as one big conglomerate. They certainly proved they knew what they were doing during the crisis and have managed to stay on top of things. The government doesn't have the right to punish private corporations for being too good, too smart, and too successful; though they have a huge track record of trying to do so.
- ComputerGuru 17y ago
  I'd appreciate someone pointing out any incongruent remarks in my statement above. It's a fact that JP Morgan succeeded where the others failed during the recession, it's a fact that their customers are happy with what they're doing, and it's NOT a fact that the government knows their business better than they do.
chris123 17y ago
Greenspan is the poster boy and enabler of this thing. Way back in June 2005 I registered http://AlansBubble.com http://AlansBubble.com to memorialize him. Sadly, but not surprisingly, this same "bubble ==> crash ==> bailout" will happen again in the not too distant future, except it will be bigger. What can be done? Here are some ideas from Nassim Nicholas Taleb: "Ten Principles for a Black Swan-proof World": http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a-black-swan-proof-world/ http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a... (see also the Nouriel Roubini links there)
known 17y ago
I strongly believe it is time now to regulate market capitalization to twice their quarterly revenue. I have petitioned SEC which is actively considering it.

50 points by Flemlord 17y ago

Flemlord 17y ago

Agreed. If it's too big to fail, it's to big to exist.

andre 17y ago
2nd that
anamax 17y ago
And the truth of that statement is not bank-specific. For example, it applies to financial regulators and even govts....
- redcap 17y ago
  You really want governments to start failing? I mean California is getting close, but that's mostly because it hamstrung itself early on by allowing citizens to promote legislation. While there are a few governments that I would like to be changed (Chinese Democracy anyone), the general trend towards democracy and liberty has been a good thing. If saw a govt does get too big to fail, having it fail could well lead to chaos or a dictatorship. I know there is a lot of whinging by Republicans in the US about 'small' government, but really you're not going to get decent change in your country overall unless the federal government acts as the states aren't up to it (seatbelt laws anyone?)
  - ams6110 17y ago
    I think in the case of governments it's not that they can be too big to fail, it's that if they get too big, they do fail. Though maybe that's the general case, now that I think about it. edit s/its/it\'s/g
  - dangoldin 17y ago
    At the same time the bigger the government the less change the country will have since most of the resources will be used by people in government to maintain the status quo.
  - cvg 17y ago
    I don't think Anamax is saying that he wants appropriate governments to fail, but rather that ginormous governments should be split as well. If a country's failure leads to chaos, perhaps the size of that government should be rethought. We should step back and realize that a government isn't some sacred perpetual institution but rather a means to represent people. If a government fails to represent it's people, it must be changed.
    - anamax 17y ago
      I thought that that's what I wrote. Thanks.
  - shpxnvz 17y ago
    really you're not going to get decent change in your country overall unless the federal government acts as the states aren't up to it (seatbelt laws anyone?) The point is that in the U.S. the Federal Government was, by design, to be limited in the powers it could exert over the states and citizens. I think the argument from those who are for "small government" is not that change such as seatbelt laws are bad or unwanted, but that the cost of and danger in relinquishing to the Federal Government the power to make those decisions is far, far greater.
dantheman 17y ago
There is no too big to fail, that is just a ploy to convince you to not be angry at your money being given to them. Sure if they failed it would be bad, but it's going to be bad anyway. All we are doing is prolonging and exacerbating the pain.
mbrubeck 17y ago
Splitting up the banks won't eliminate the "too big to fail" problem. If a systemic crash (like the one last year) causes hundreds of smaller banks to fail, there will be just as much pressure to bail them out as if one giant bank fails.
- MaysonL 17y ago
  99 have already failed this year, and probably 2 or 3 hundred more will fail before this crisis is over, and their depositors have been bailed out - their stockholders and management haven't, unlike the big guys.

pelle 17y ago

Isn't it better to just let them fail next time instead. That would force the big banks to split up themselves.

deleted 17y ago
[deleted]
falsestprophet 17y ago
We need new legislation to provide for a quick route out of bankruptcy for these financial institutions. Regulators should be able to declare a bank insolvent then -- overnight -- wipe out shareholder equity, convert debt and top up tier 1 capital. For these institutions, a bankruptcy plan should be required like a fire escape plan is required.
- jeromec 17y ago
  No, I think bankruptcy is little better than failure unless the gov. will pump in funds as well. Take AIG for instance, which backs debt at various levels. Clearing the books of that juggernaut would still send ripples through the system, likely freeze up credit markets, and wreak stock market havoc. I think Greenspan is right about breaking up such institutions.
  - falsestprophet 17y ago
    No, I think bankruptcy is little better than failure unless the gov. will pump in funds as well. That is what topping up tier 1 capital is about. The bankrupt bank may end up being temporarily partially or wholly owned by the government. Clearing the books of that juggernaut would still send ripples through the system, likely freeze up credit markets, and wreak stock market havoc. I think Greenspan is right about breaking up such institutions. I suspect you would then have 100 bankrupt companies instead of one. More careful derivatives regulation is obviously prudent, specifically there really ought to be ring-fenced capital backing up derivative instruments (like is required for proper insurance).
    - 17y ago

hristov 17y ago

Now he starts having ideas. I did not hear him make a peep when the largest and most problematic of these banks (Citigroup) was created and when they had to have a complete overhaul of the nations banking laws to create that particular bank. No, he actively supported the new laws intended to create citigroup and which also resulted in another bunch of oversized financial institutions including AIG. And later he guaranteed bank profits by lowering interest rates whenever banks were in just a little bit of trouble. The inevitable result was an asset bubble and rates so low that when we had an actual crisis, the fed could not do anything. But now, when he is out of power, he finally figures out that the existence of banks that are so large and powerful that they can get the government to ensure their profitability might not be good for the free market after all. Good job!

unalone 17y ago
He did apologize profusely and say that his beliefs had been proven irrevocably wrong. I'm willing to cut the guy some slack, even if he did fuck up on a level most people aren't allowed to fuck up on.
- deleted 17y ago
  [deleted]
- fnid 17y ago
  where did he apologize? Link?
- sown 17y ago
  He never really apologized This blog sums it up: http://greenewable.wordpress.com/2008/10/23/greenspan-about-as-close-to-an-apology-as-well-probably-get/ http://greenewable.wordpress.com/2008/10/23/greenspan-about-... and http://sanders.senate.gov/newsroom/news/?id=bc863544-b90f-4eda-bafb-ecd9ae0f77ef http://sanders.senate.gov/newsroom/news/?id=bc863544-b90f-4e...
pg 17y ago
Better to admit his mistakes than never to. Nearly all government officials make mistakes. What fraction admit them? Whatever minuscule n% do, he's in the (100-n)th percentile.

jeromec 17y ago

Wow, Greenspan just won a bunch of points in my book. > 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. I have the same sentiments. > “Failure is an integral part, a necessary part of a market system,” I agree. > “If you start focusing on those who should be shrinking, it undermines growing standards of living and can even bring them down.” I think his proposal is one we should act on.

mcantelon 17y ago
That's kind of like an airplane pilot getting drunk and crashing a plane, killing hundreds, then saying publicly that pilots shouldn't be allowed to drink.
- roundsquare 17y ago
  Although, to make the analogy complete, you have to start with the assumption that people didn't know airline pilots shouldn't be drunk while flying. It seems obvious in hindsight but at the very least, this pilot thought drinking on the job was ok.
  - mcantelon 17y ago
    Pretty much every bubble in modern financial history, including the great depression, resulted from easy credit with nothing behind it.

jorgem 17y ago

The problem is that they will be broken up "poorly". The bigwigs will keep the good parts, and give the crappy, debt-ridden parts to the government, or let them fail. Kinda like GM (although I'm not sure there were any good parts).

gaius 17y ago
This is exactly what Northern Rock did in the UK. http://www.independent.co.uk/news/business/news/plans-for-northern-rock-to-split-into-a-good-and-a-bad-bank-1802781.html http://www.independent.co.uk/news/business/news/plans-for-no... Compared to Gordon Brown, Greenspan is an economic genius.
tmsh 17y ago
Another problem is that a former Fed chairman should know how to break up the banks instead of simply saying 'break up the banks'. There's already a clearly defined line in which to break up each bank. It's called the Chinese wall. http://en.wikipedia.org/wiki/Chinese_wall#Finance http://en.wikipedia.org/wiki/Chinese_wall#Finance However, by converting the major investment banks to bank holding companies, Paulson basically got rid of this division. There should be risk-taking investment sides of large investment firms which do not have the luxury of being bailed out (i.e., people who trade CDSs, etc.), but equally there should be large commercial banks that form the backbone of our financial industry and provide the largest channels of liquidity. And these two sides of the company (buy side and sell side) should always be separate companies. But obviously there need to be people with actual investment banking experience or who know enough of how the industry works, but also have an interest (which to most financiers would appear highly irrational) in fairness for the general public. Such people just don't exist yet. Hopefully in the future they will tho. Anyhoo.
- roundsquare 17y ago
  I respectfully disagree with using the Chinese Wall (only a little bit though). Seems like it would work in general, but I believe there are groups that sit on top of the Chinese Wall. Stil, its a reasonably good place to start.

deleted 17y ago

[deleted]

ironsam 17y ago

"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." I like how the answer for meddling that causes problems is more meddling that is going to cause other problems. Maybe we shouldn't be listening to the major player who screwed our monetary policy for 20 years.

3pt14159 17y ago

Every time I hear or read what Greenspan says I become more and more convinced that his goal is to bring down the system ala Atlas Shrugged style. These are not the words of an objectivist, they are the words of a statist. Or, at very best, an extremely pragmatic capitalist. Dude is trying to bring down the whole Money as Debt and Corporatism system in on swoop. Note to the strikers: Bring me with you.

philwelch 17y ago
While it's true that Greenspan was a close associate of Ayn Rand for years, it rises to the level of conspiracy theory to suppose that Atlas Shrugged was meant as some sort of blueprint for real world action crafted in the 1950's and slowly implemented over time by Rand's associates. Right up there with the theory that Rand is a member of the Illuminati and Atlas Shrugged is the Illuminati game-plan to take over the world.

ComputerGuru 17y ago

Honestly, I'm more than happy with my bank (JP Morgan/Chase) staying as one big conglomerate. They certainly proved they knew what they were doing during the crisis and have managed to stay on top of things. The government doesn't have the right to punish private corporations for being too good, too smart, and too successful; though they have a huge track record of trying to do so.

ComputerGuru 17y ago
I'd appreciate someone pointing out any incongruent remarks in my statement above. It's a fact that JP Morgan succeeded where the others failed during the recession, it's a fact that their customers are happy with what they're doing, and it's NOT a fact that the government knows their business better than they do.

chris123 17y ago

Greenspan is the poster boy and enabler of this thing. Way back in June 2005 I registered http://AlansBubble.com http://AlansBubble.com to memorialize him. Sadly, but not surprisingly, this same "bubble ==> crash ==> bailout" will happen again in the not too distant future, except it will be bigger. What can be done? Here are some ideas from Nassim Nicholas Taleb: "Ten Principles for a Black Swan-proof World": http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a-black-swan-proof-world/ http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a... (see also the Nouriel Roubini links there)

known 17y ago

I strongly believe it is time now to regulate market capitalization to twice their quarterly revenue. I have petitioned SEC which is actively considering it.