The most conspicuous absence from the invigorating debate about too-big-too-fail is Ben Bernanke. After pushing that issue on Congress hard these past months, the Federal Reserve Board seems to have no ideas of its own on the table (did I miss them?).
There is much to take issue with in Alan Greenspan's WSJ Op-Ed today.
I reject the notion that boom-bust, of this variety at least, is just as 'normal' as apple-pie, that, every 100-years, competition lowers quality to the point that the system breaks. Rather, it was about unmitigated greed, ...
We do NOT need "forecasting" of systemic breakdown. All we need to know, for regulation, is that "breaks" will occur, even when least expected, perhaps.The idea that less (or more) moral hazard is a solution, or spur to self-regulation, is laughable. Wall Street has proven time and again it is invincible. There is no hazard big enough, moral or otherwise, right?
I reject the notion that boom-bust, of this variety at least, is just as 'normal' as apple-pie, that, every 100-years, competition lowers quality to the point that the system breaks. Rather, it was about unmitigated greed, that was easily recognizable from prior patterns (cf. Greentree Financial). It was about poor management structure - Lehman's board got near failing grades - and unworldly, unchecked pay packages.
So, it's not that a residual risk has to be left with the firm (as notes Krugman) - you could argue that happened, because the firms, Merrill, Lehman, Bear, did end up with toxic inventory. Instead, it suggests that a residual risk has to be left with specific managers of the firm, perhaps including a more thorough-going shareholder right-of-action against the firm principals, especially in terms of disgorging compensation and/or going to jail.
There is a lot more, including the role of massive off-balance sheet risk (including extended trade-floor operations call "prime brokerage"), Soros, and Group30, firewalls, but that's a broad sweep.
