The Completely Mad Alan Greenspan

Alan Greenspan is out with an odd piece in today's FT. In it, he warns of the dangers of governments who rush to prevent failure of large firms:

What is not conjectural, however, is that American policymakers, in recent years, faced with the choice to assist a major firm or risk negative economic fallout, have regrettably almost always chosen to intervene. Failure to act would have evoked little praise, even if no problems subsequently arose; but scorn, and worse from Congress, if inaction was followed by severe economic repercussions. Regulatory policy, as a consequence, has become highly skewed towards maximizing short-term bail-out assistance at a cost to long-term prosperity.

This bias leads to an excess of buffers at the expense of our standards of living.

This is all very true. But it is pretty much like the town hooker discussing the virtues of abstinence. When Greenspan ran the Fed, he rushed to protect the elitists, whenever there was a signal of a serious downturn on Wall Street. And, hey, didn't the housing bubble develop under Greenspan's watch?

In the same piece, while warning against bailouts, Greenspan notices the $1.6 trillion in excess reserves and appears to prefer that these reserves be in the system propping up the entire economy:
Mad. Since these excess reserves are Federal Reserve "high powered" money, even if only 10% were moved into the system it would cause such a price inflation that it might even move Greenspan's memoir out of the dollar bin.

Bank managements, currently repairing their demonstrably flawed risk management paradigm, have been moving aggressively to build adequate capital to enable them to lend. For the moment they are expanding their loan portfolios only marginally. Most of the new capital appears to have buffer status, rather than being directly involved in spurring day-to-day lending. Deep uncertainty about our economic future, as well as the potential level of regulatory capital, has unsettled bank lending. More than $1,600bn in deposits (excess reserves) at Federal Reserve banks are lying largely dormant despite available commercial and industrial loans that, according to the Fed, entail “minimal risk” and are yielding far more than the 25 basis points Reserve banks are paying on such deposits. The excess reserves thus seem to have taken on the status of a buffer, rather than actively participating in, and engendering, lending and economic activity.