Alan Greenspan, a former Federal Reserve chairman, believes the U.S. government made a big mistake with its "too big to fail" policy after the 2008 financial crisis, saying he favored letting drowning banks sink into Chapter 11.
"I would like to see all institutions go through Chapter 11 if they get into trouble," Greenspan said Tuesday during a lunchtime Q&A session at the Securities Industry and Financial Market Association's (SIFMA) annual meeting in New York. "We don't allow that to happen anymore. If you try to prevent it, you run into all kinds of serious troubles."
Looking at what he termed "the greed of Wall Street," Greenspan was certainly more outspoken in sharing his thoughts about the U.S. markets than he ever was during his 1987-2006 tenure as Fed chairman.
Turning from the 2008 failure of the banking system to the current attempts to fix it with Dodd-Frank reform, Greenspan said he had "no doubts" that the reform act would be a disappointment.
"Dodd-Frank is essentially there to restrain competition," he said, adding that it would be "physically impossible" to enact all of the provisions of the 2,300-page law.
What the U.S. economy needs now, Greenspan said, is the ability to move society's savings into profitable investment in cutting-edge technologies. But the problem is that when banks are too big to fail, they tend to misuse those savings, he said.
"If large bank X is overextended and supported by the monetary system of a central bank, that institution does not worry about the golden rule because at the end of the day it will be bailed out. As a result, there is abnormally low capital in the banking system," Greenspan said.
To be sure, the problem has become a global one, because too big to fail is happening in enough countries to show that it is not indigenous to the United States, Greenspan said. "If you're a banker and there's no lender of last resort, your capital drains out and you become inefficient."
