Alan Greenspan’s recent swipe at big bank bailouts misses the mark. The former U.S. Federal Reserve chairman said the inevitability of another rescue for financial behemoths means government debt is understated. That ignores the tidy profit taxpayers have made from saving Wall Street’s hide. Regulators deserve a lot more credit for limiting likely losses in future crises.
In an interview at the Peter G. Peterson Foundation’s annual fiscal summit, Greenspan claimed that unexpected shortfalls from events like the $6-billion London whale trading fiasco in 2012 were common at JPMorgan when he was running the Fed. Yet Uncle Sam’s $12.5-trillion debt tally fails to account for such contingencies, he complained.
The whale debacle itself belies his contention. JPMorgan’s substantial capital allowed it to easily absorb the loss, making any rescue completely unnecessary. All of the six largest U.S. banks are currently in decent shape, too. They had $750-billion in Tier 1 capital at the end of last year, $320-billion more than at the end of the second quarter of 2008. It’s hard to imagine any of them failing because of an isolated and unexpected loss.
More troubling is the potential for another credit bubble similar to the one that required a $700-billion bailout program after the 2008 financial crisis. As it turned out, the six giant banks used only $165-billion of that amount and repaid all of it – with interest – a few years later. Ultimately, the Treasury Department’s intervention resulted in a profit for taxpayers, effectively reducing the federal debt by nearly $21-billion.
Greenspan also fails to account for the financial reforms passed by Congress in 2010. Banks now hold much more low-risk capital, and other safeguards also reduce taxpayer exposure. What’s more, the reforms created a reasonable mechanism for resolving troubled large institutions. Even if losses exceed assets after a bank is liquidated, taxpayers don’t pay a penny, because the financial industry must cough up the difference.
Granted, another financial crisis could send debt soaring, but not in the way Greenspan predicts. Spending required to stimulate the economy could be the culprit rather than costly bank bailouts. In any event, the former Fed boss is beginning to sound a bit like a fiscal Cassandra.
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