If you?ve read Roy Cordato?s critique of current Federal Reserve Chairman Ben Bernanke?s policies, you might find interest in Geoff Colvin?s latest Fortune article, in which previous Fed chairman Alan Greenspan attempts to defend his record.
Much has been made of Greenspan?s October 2008 congressional testimony, in which he admitted that the events of recent years did not comport with his fundamental beliefs about the economic system. But that doesn?t mean the man once known as ?The Maestro? is now ready to turn more of the economy over to the government:
Self-interest failed, Greenspan believes, mainly because no one, including himself, understood the costs of the extremely unlikely risks the big banks faced. “This is a once-in-a-century event,” he says.
It may seem unsurprising that in those rare circumstances the banks disastrously misjudged their counterparties, mainly other institutions that owed them payments. But a central element of Greenspan’s belief system was that such things don’t happen. “Counterparty surveillance failed to protect the system this time,” he says. “I always thought it would. I held that belief for 60 years.”
Yet he doesn’t believe tougher regulation by the Fed could have saved the banks. The problem in his view is that regulators would be much worse than the banks themselves at judging banks’ counterparty risk. “I was on the board of J.P. Morgan prior to becoming Fed chairman,” he says. “I knew what J.P. Morgan knew about Citi, Bank of America, Wells, and others. When I arrived at the Fed, I quickly learned that J.P. Morgan’s knowledge of those organizations was far greater than what the Fed knew.”
Greenspan isn’t opposed to more regulation, mostly fine-tuning. But on the central issue of self-interest, the safeguard that failed, he isn’t giving up. He wants banks more exposed to market discipline by making sure that the “too big to fail” doctrine disappears. “Counterparty surveillance will remain the regulators’ first line of defense,” he says. The banks may have blown it, but now they’ve learned how to do it better, and that’s what they must do.
