Please, Mr Greenspan, Shut Up

If ever there was a need for gag orders on former central bank chairmen, it is now. Actually, scrap that: if ever thre was a need for a gag order on Alan Greenspan, it is now. The rest of them have all acquitted themselves quite admirably; Greenspan, alone, seems determined to kvetch and second-guess and generally be an unhelpful nuisance to his successor.

The Economist reports on his latest salvo, which is positively astonishing coming from a man who was, for his many years at the Fed, not only the chief bank regulator but also the lender of last resort should there be an emergency. He never seemed to have any trouble with this at the time -- but now, it seems, he's changed his mind:

Better someone else be in charge of bail-outs, he argues, than the Federal Reserve, which he led for 18 years.
Mr Greenspan says a high-level panel of American financial officials should be given broad power to seize any financial institution whose failure threatens the entire economy, bail out its creditors and close it down...

Greenspan sounds a little like Larry Summers, with his desire for ex-ante frameworks. The Economist quotes his memoir's new epilogue:

"The critical need...is to formalise...the procedures improvised in the case of Bear Stearns. This should ensure that in the future, government financial assistance to lending institutions does not impact the Federal Reserve's balance-sheet and monetary policy."

Or, in English: remove the lender-of-last-resort and bank-regulator functions from the Fed, and give them back to me, Alan Greenspan. (Sorry, give them to "a high-level panel of American financial officials".) Make sure that when markets run into a crisis, the Fed only has one policy tool at its disposal, the Fed funds rate. And tell the Fed that it should lend only to the US government, not to anybody else; if the US government then wants to lend to banks, that's a matter for the legislature and the executive, not the Fed.

This is very silly stuff. Does Greenspan want the Fed to abolish the discount window too, while he's at it? And has he forgotten that the Fed funds rate is, actually, an interbank interest rate? The Fed is a creature of the banks: indeed, it's owned by the banks, and it is in the best interests of both the banking system and the country as a whole that it remain that way. Greenspan's plan is, in truth, a covert partial nationalization of the banking system: it would serve only to politicize something which at the moment is in the hands of very able technocrats like Ben Bernanke and Tim Geithner.

But given that it's not going to happen, Greenspan's plan is really just another way for him to undercut Bernanke's authority. I hope that Washington sees it for what it is, and gives it all the attention it deserves, which is none.

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