Thursday, 19 February 2009

A 180 degree turnaround...

Mr Alan Greenspan, former Federal Reserve chairman and once regarded as the strongest advocate for laisser-faire capitalism, made recently an astonishing "change of mind" on his views how the US government should fix the broken financial system:

"The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit. Nationalisation could be the least bad option left for policymakers. It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring. I understand that once in a hundred years this is what you do.”

"In some cases, the least bad solution is for the government to take temporary control of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism. Temporary government ownership would allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

He cautioned, however, that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks. This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

Quoted from Financial Times, February 18, 2009

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