Greenspan Gets Real – Break Up The Banks

In “Greenspan Suggests US Should Consider Breaking Up Large Banks” Bloomberg News suggests that both itself and “the Maestro” are coming to recognize and support the obvious solution to our financial crisis. The large Wall Street banks have long ago  become a parasitical force antithetical to the free economy that Greenspan, like most Americans, supports.

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.”

This is an issue explored here before, perhaps best in thinking about Simon Johnson’s article “The Quiet Coup” and in exploring Greg Mankiw’s suggestions in “The Right Solution For The Banks”

When Greenspan adds his voice to the chorus, it is clear that only the corrupt political control that the large banks enjoy in Washington is keeping them protected from the exercise of all the existing banking and anti-trust regulations that would otherwise demand their power be constrained, their insolvency be recognized and their assetts seized and sold off.

Greenspan’s free market ideals, like my own, are severely compromised by what Simon Johnson, a professor at MIT’s Sloan School of Management and chief economist at the International Monetary Fund during 2007 and 2008 rightly describes as a corrupt oligarchy. The continued impacts of the big Wall Street banks is a core problem in our economy. Rather than subsidizing and protecting them, the Treasury Department should be breaking them up.

Greenspan points out that merely imposing regulatory restraints is not sufficient when institutions become so large that their potential failure threatens the entire world economy.

“I don’t think merely raising the fees or capital on large institutions or taxing them is enough,” Greenspan said.

While Greenspan was typically somewhat obtuse in his remarks, the implications were far more clear than is his norm. Like most Americans, he is realizing it is well past time to break up the big banks if we want to preserve the free market economy our country was built on.

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