July 27, 2011

Alan Greenspan, silently fade away, please

Sir, Alan Greenspan writes “Had banks and other financial entities maintained adequate equity capital-to-asset ratios before the 2008 crash, then by definition no defaults or contagion would have occurred as the housing bubble deflated…. Bank management, currently repairing their flawed risk management paradigm…”, “Regulators must risk more to push growth” July 27. What on earth is Greenspan talking about? 

If the regulators, like Greenspan, had not decided that the capital requirements for the banks were to be set in accordance to the perceived risk of default of each individual asset, then those triple-A rated securities backed with lousily awarded mortgages to the subprime sector, and which in essence became to coffin of the housing bubble, would not even have existed. 

Of course any safety buffer comes at a cost, but also, if that cost is not shared equally, the final real cost could go up exponentially. In this case the regulators, by discriminating against those perceived as “risky”, like the small businesses and entrepreneurs, have, just like the Lilliputians tied up Gulliver, effectively tied up the Western World in an arbitrary and defeatist risk-adverseness, and that we must urgently break away from. 

Greenspan, as the other regulators, after what they´ve done and in much are still doing, have no right to sermon anyone about the need of risk-taking. He, for his own good, should just do as old soldier are said to do… silently fade away, instead of hanging around trying to impose on history their version of their Basel-Waterloo. I hold this because in order to understand the real need for risks, you have to be able to understand the real dangers of risk-aversion.