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Greenspan's latest words

There's a lot of hubbub about a paper former Fed Chairman Alan Greenspan is presenting today. In it, he (once again) comes to his own defense and says the Fed's low-interest rate policies had very little to do with the housing bubble and that the financial crisis was inevitable. No need to rehash that, but he's right about one thing.

At the end of Greenspan's 48-page paper, "The Crisis" he writes (emphasis mine):

The major failure of both private risk management and official regulation was to significantly misjudge the size of tail risks that were exposed in the aftermath of the Lehman default. Had capital and liquidity provisions to absorb losses been significantly higher going into the crisis, contagious defaults surely would have been far less.

This paper argues accordingly that the primary imperative going forward has to be (1) increased regulatory capital and liquidity requirements on banks and (2) significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades.

In other words, Greenspan is arguing that banks should be required to maintain a capital reserve cushion that can absorb unexpected blows. And trades should be backed with actual collateral -- a novel concept that might have prevented AIG from being torn apart.

But in testimony last month, current Fed Chairman Ben Bernanke suggested the Fed might eliminate reserve requirements.

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

The Economic Collapse is highly critical:

If there were no minimum reserve requirements, what kind of chaos would that lead to in our financial system? Not that we are operating with sound money now, but is the solution to have no restrictions at all? Of course not.

What in the world is Bernanke thinking?

The truth is that Bernanke is making a mess of the U.S. financial system.

There was a time when Greenspan was like EF Hutton. People stopped and listened. He's pretty much lost that status by constant revising his theories to deflect criticism. But that doesn't mean he's always wrong.

Greenspan also thinks a "systemic regulator" is a bad idea, and there again, many people agree that such a regulator will find it difficult to prevent a future crisis. Greenspan says -- "The current sad state of economic forecasting should give governments pause on the issue."

It's hard to argue with that.

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So, Scott, if I may, Alan Greenspan is saying that if you're going to make a bet, you should have the money to pay it? Who knew?

Let's get real. Market failures exist, as we have seen in a BIG way. The pendulum needs to swing more in the direction of government intervention (which it has) rightly so. We need a systemic regulator. FINANCE is just trying to hold onto what they claim they have own (and want to own) for the last 30 years.

"
collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades.

In other words, Greenspan is arguing that banks should be required to maintain a capital reserve cushion that can absorb unexpected blows. And trades should be backed with actual collateral — a novel
"

Novel? Actually paying for a purchase is a novel concept, novel concept as in Nova, as in new? Naaaah! It is new -- I promise. Sit back, relax, and enjoy your monomer fragrance as it oozes out of your polymer, through your nose and into your genome just in time to change your cell to cancer. Enjoy your new-car-smell, your monomer flavor. But will all of this embarrass the vendor of financial instruments who forgot to demand payment until now? Will he think of how silly he was before, now that he is actually getting paid?

Is all of today's blather gravitating towards reserve requirements, and bank's ability to make love out off nothing at all, not to mention credit de novo? Should we be talking about the more ominous looming failure of banking system? Is our bank CEO merely a lab-rat recently trekking off into the wrong branch of his maze? Have surviving CEO-rats shuffled down on-line-transaction-lane to outstrip *to big to figure how to dump brick&mortar*? When my on-line broker was giving me $7 transaction trades for a decade, looser-rats were charging $155 for same transactions, charging more to pay for overhead of brick&mortar that they had inherited. But they also inherited other animals, lot of lobbyist, and more than a few Tammany Hall type politicians. Who will feed these fat animals now? Who will put them to sleep?

U B Judge

U B Vet

If banks cannot leverage as they have then they cannot rake in huge gains. Mega banks have the financial critical mass to buy the legislation they want just as large corporate trusts did before TR reduced them.

Unless the TBTF banks are dismantled they will continue to create the volatility they profit from. When the inevitable financial / economic crises ensue, as they have over the past three decades, then our government will make the rest of us cover their losses. We could call that socialism for the rich or perhaps welfare capitlaism.

This also destroys economic opportunity for the rest of us. As this OECD report documents there is much less economic opportunity in America than in Denmark, Australia, Norway, Finalnd, Canada, Sweden, Germany and Spain.
http://www.oecd.org/dataoecd/17/42/44566315.pdf

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