Greenspan: Don't use Fed as a 'magical piggy bank'

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(Agencies)
Updated: 2008-09-05 14:50

Fed Chairman Ben Bernanke, who took the helm after Greenspan, has repeatedly defended the Fed's actions, saying they were necessary to avert a meltdown of the entire financial system, which would have devastated the US economy.

Bernanke's Fed also has taken a number of unconventional -- and some controversial -- actions to shore up the shaky financial system and to get credit, the economy's lifeblood, flowing more freely. It agreed in March to let investment houses draw emergency loans directly from the central bank. And, in July, the Fed said Fannie Mae and Freddie Mac also could tap the program. For years, such lending privileges were extended only to commercial banks, which are subject to stricter regulatory supervision.

Greenspan, 82, who ran the Fed for 18 1/2 years and was the second-longest serving chief, says he is concerned that Capitol Hill will look to the Fed's actions "as a wondrous new font of seemingly costless federal funding -- a magical piggy bank."

The United States has long "abandoned the notion that we should leave crises to be resolved solely by the marketplace," Greenspan says in making the case for new powers in this area.

The ex-Fed chief says he is skeptical of a sweeping plan, put forward by Treasury Secretary Henry Paulson, that would turn the Fed into a uber cop of sorts -- responsible for policing financial market stability. "Much as we might wish otherwise, policymakers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances," Greenspan says.

Greenspan calls the current crisis "one of those rare, once in a century or half-century events." The full closure on this crisis is "a way off," he says. The US economy, he observes, appears to be "on the brink of recession." And, worldwide inflation, he warns, is creeping, which will pose a challenge to central bankers, he says.

Looking back, Greenspan says governments and central banks probably could not have altered the course of the once high-flying housing market and broken through investors' fevered euphoria.

He believes that the government should have gone after fraudulent mortgage practices, however. "Bank regulators, who are expert in accounting, banking law and risk management, are not equipped for this job," he says. "It requires law-enforcement professionals."

Greenspan has taken much criticism for failing to crack down on dubious lending practices that eventually came to roost with the subprime meltdown and for failing to act as a forceful banking regulator. He also has been blamed for keeping interest rates too low for too long, feeding the housing bubble.

The epilogue can be purchased separately for $8 as an electronic, or "e-text," the first such release under a program from publisher Penguin Group (USA). "We know that many who read the hardcover or e-books edition ... would be interested in the new material written by Dr. Greenspan without having to buy the whole book again," says John Fagan, Penguin's marketing director for e-books.

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