Greenspan Warns That Future Financial Crises Could Occur

Alan Greenspan, Former Federal Reserve Chairman, warned policy makers on Wednesday that if steps aren’t taken now, the United States could see another financial crisis in the near future. He noted that necessary adjustments would need to be made to avoid having “too big to fail” firms cause the disastrous crisis of that hit the economy in 2008.

Changes Must be Made Now

In order to defend against what Greenspan described as “the most virulent global financial crisis ever,” he appeared before the Financial Crisis Inquiry Commission on Capitol Hill to discuss new standards for the financial system.

His goal is to make the financial system more resilient to accommodate yet-to-be-created financial products that he believes could still cause future a financial crisis. He wants to eliminate the notion that any firm can be too big, or too interconnected, to not be liquidated or allowed to fail.

If a repeat of 2008 was allowed to occur, the economy would suffer again as taxpayers would be forced to give up their hard-earned money for someone else’s major mistakes.

How Can a Crisis Be Avoided?

Greenspan noted that a few changes could be made to help avoid a crisis in the future:

• Higher capital requirements: One major change Greenspan proposed was for financial institutions to have higher capital requirements. The serial default of the past 18 months and excessive executive pay would not have occurred had there been adequate risk-based capital and liquidity.
• Contingent capital bond: Another idea Greenspan proposed was to require banks and other financial firms to hold a special type of “contingent capital bond,” or debt, that would automatically be converted into equity if an institution’s equity capital fell below a certain level.

Despite Greenspan’s proposals, many lawmakers are critical of his attempts to make changes, noting that it was his time with the Federal Reserve that contributed to the downfall of the economy. Greenspan, on the other hand, defended his time with the Fed, stating that he did his best to protect consumers and instead blamed the risky behavior of financial firms for the financial crisis.

He’s not the first to make proposals to avoid a future crisis. Senate Banking Committee Chairman Chris Dodd (D-Conn) made financial news by releasing his own detailed proposal in March.