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Greenspan: Don't use Fed as a 'magical piggy bank'
(Agencies)
Updated: 2008-09-05 14:50 WASHINGTON -- Troubled by the Bear Stearns debacle, former Federal Reserve Chairman Alan Greenspan is advocating a new way of dealing with government bailouts of companies whose sudden collapse could wreak havoc on the country's economic and financial stability.
A high-level panel of financial officials should be given broad authority to quickly determine whether a failing company poses a sufficient threat to the entire US economy, he recommends. If so, the company would be shut down. "We need laws that specify and limit the conditions for bailouts -- laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than circuitously through the central bank as was done during the blowup of Bear Stearns," Greenspan wrote in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World." (The paperback will be released Sept. 9; the hardcover came out last year.)
Costs to taxpayers would still be a concern, he acknowledges. As with the RTC, however, the public cost could be minimized, he says. Critics in Congress, in academia and elsewhere worry that the Fed's unprecedented actions -- including financial backing in March for JPMorgan Chase & Co.'s takeover of Bear Stearns Cos. -- are putting taxpayers on the hook for billions of dollars of potential losses. They also say it encourages "moral hazard," that is, allowing financial companies to gamble more recklessly in the future. |