Greenspan Abandons Free Market

October 15th, 2009 by Jason · 4 Comments · greenspan

citi_breakup

Ha ha, scare headline. So now Alan Greenspan is advocating that banks too big to fail should be broken up into lots of tiny little banks, like Constructicons. Yes, that same Alan Greenspan who partied with Ayn Rand and was unable to even pronounce the word “regulation” until his fifty-third birthday.

“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.”

For perspective, Alan Greenspan is so old that he only missed the 1911 breakup of Standard Oil by 15 years. For even more perspective, he is so old that he forgot Standard Oil was broken up for monopolistic practices, not for threatening stability of the global economy in the event of its collapse. But let’s not hold that against him, he’s got a larger point to make.

At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac, and the Treasury and Fed bailed out Bear Stearns Cos. and American International Group Inc.

“It’s going to be very difficult to repair their credibility on that because when push came to shove, they didn’t stand up,” Greenspan said.

Hank Paulson, you just got…served? Kind of? Is this what it looks like when an old man brings the fight to your yard? Anyway, this sort of makes it clearer why the normally laissez-faire Greenspan is suddenly in favor of such drastic government intervention: because of drastic government intervention. Wait, what?

According to Greenspan, the government stepping in with what amounted to a bridge loan to Bear Stearns (bridge loan, get it? Jimmy Cayne gets it) and an epic loan(s) to prevent AIG from killing every man, woman, and child in the industrialized world, was a bad intervention. On the other hand, the government forcibly breaking large (and profitable) companies down into smaller companies, despite having no legal standing to do so, in the name of preventing a possible catastrophe, is perfectly acceptable. In fact, it’s good and necessary.

Can you imagine the epic lulz when the call comes into Ken Lewis telling him that, after all the to-do about being forced at actual gunpoint to buy Merrill Lynch last year because the firm couldn’t stand on its own, now they’ve gotta spin it off because Bank of America is too big? Even though the reason it’s too big is Hank Paulson made it too big? And when the ensuing fallout cost Kennay his job? Ken Lewis might murder everyone in Charlotte that day.

We would like to be the first to remind Alan of what happened when AT&T was forcibly broken up into three million tiny companies: through a series of mergers, AT&T re-bought most of the Baby Bells and is once again a raging monopoly in every area it services only twenty-five years later. Just putting it out there.

Let ‘em fail, break ‘em up, tax ‘em so they don’t want to grow, leave ‘em be, whatever. We here at LOLFed will make fun of whatever is done to resolve the whole too big to fail unpleasantness with equal parts exasperation and mild annoyance. Just be consistent about it. That is all we ask of our leaders and figureheads and doddering old people who used to be one of the first two. If you’re Alan Greenspan and you spent your time running the Fed by trying to keep it at arm’s length from the market, fine. That’s your schtick, and besides the housing bubble, it worked pretty well for you. But either own that schtick or come out and say you were wrong, don’t try to have it both ways. If you’re still Mr. Free Market, too big to fail can’t exist because failure is a risk that everyone shares regardless of size and consequences. If you believe the only solution to this problem is to take a wrecking ball to an entire industry, then logic would dictate that you admit your policies were failures. Puff it or pass it, man.

4 Comments so far ↓

  • bb

    none of the banks is too big to fail. the problem is that each one holds the others by the balls with hands (aka interconnected). you hit one of them, it clenches the genitals of 2 others who on their turn clench 2 more and so on, you get the picture. small and less interconnected banks (means broken by line of business) means less balls pain. the old man is right about that, though he never had balls.

  • will

    How is breaking up over-large companies not a free market approach? If we had lots of small banks they might *gasp* actually compete for our business.

  • Jason

    The free market approach would have a company grow as much as it’s able and, in the event that it becomes to large to remain cohesive, also allow it to fail without intervention. That’s the “free” part.

    What you’re talking about is the opposite of a free market, even though it would achieve the same end result as free markets are supposed to. I’m not saying he’s incorrect, this is just the last thing I would have expected to hear him say, given his track record.

    Next thing you know he’ll be calling for the repeal of the Riegle-Neal Act.

  • Andy

    I think the problem that Mr. Greenspan is identifying is that our polity lacks the will power to let things fail when they should fail. So in order to track a free market result as closely as is reasonably practicable in our foreseeable long-term circumstances, we should never let a company get so much big that it can hold such a big political bludgeon over our heads.

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