Greenspan: “Break-Up Big Institutions”

In Financials, Politics on October 16, 2009 at 10:56

GreenspanFormer Federal Reserve Chairman, Alan Greenspan, is back on the ‘front-page’ following his views on the role of big financial institutions on the economy. He argues the ‘break-up’ of those financial institutions titled ‘too-big-to-fail’, which have been recipients of massive government bail-out funds. These institutions also seem to enjoy governments’ shoulders in the form of guarantees that can be translated to lower costs of borrowing for them.

Greenspan thinks that a potential AIG bankruptcy would have been “an integral part, a necessary part of a market system”. If these institutions are too big to fail, then they are simply too big damaging capitalism. He brings as an example the break-up of Standard Oil back in 1911 where he claims that the individual parts became more valuable. Someone needs to remind him that this is 2009 and economic structure have changed, and the world has evolved.

I see no point in breaking-up any institution that has become ‘too-big-to-fail’ as new will emerge and so on and so forth. Witnessing AIG collapse would undoubtedly offer to most of us a huge amount of satisfaction in the short-run, but would also create a black hole in the insurance market with an immeasurable domino effect in global markets. Let’s not forget that today’s economy is highly dependent on the financial sector and highly interlinked.

What needs to be done is for the governments to tighten regulations and intensify monitoring on such institutions to avoid phenomena similar to AIG’s where insurance companies would behave like hedge funds. Capitalism without ‘too-big-to-fail’ institutions is like Greenspan without his glasses. None of them would function..

by the Self-Seeker

  1. So lets transform big institutions to smaller and more easily controlled firms!!!
    Suppose that after some years these companies make profits, capitalized them , attract investors and grow up again!What would happened next??
    Does Greenspan suggest to impose restrictions in the growth of companies as well??? Do you call this free-market Alan???
    Well, more striclty regalutions to monitor ,in a sense , ‘too big to fail’ institutions and to decrease speculation in the way that they invest their funds could be a more rational idea!!!!!!

  2. Apparently Greenspan seems to be suffering an identity crisis lately; although he used to be a free-market advocate, with this storm his ideology has been shocked. But I think that everything starts form the idea of excessive risk taking and high leverage which basically translates into investing more money than your finances can actually sustain. Somehow realism needs to be incorporated into the system without having to sacrifice the ‘idea’ of risk.

  3. Greenspan knows what he’s talking about. We should probably listen.

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