Former U.S. Federal Reserve Chairman Alan Greenspan on Wednesday questioned the ability of a potential new systemic risk regulator to forecast future financial crises.
Certainly do not give a systemic regulator the job of determining when the next financial crisis will hit, said Greenspan in a speech at the American Enterprise Institute, a Washington, D.C. think tank.
As part of a wide-ranging policy response to the worst financial crisis in generations, the Obama administration and Congress are debating forming a new regulator to detect and intervene to prevent future crises.
The administration has been leaning toward giving this job to the Fed, but some members of Congress oppose that approach and are eyeing alternatives, such as a council of regulators.
The notion that you can actually forecast when the crisis cracks is without any evidence, Greenspan said.
Forecasters as a group will almost certainly miss the onset of the next financial crisis as they have in the past.
In addition to questioning one of the most basic premises of the idea of a systemic risk regulator, Greenspan said he is concerned that the government's financial bailout program has made a few large banks and companies too big to fail.
Too-big-to-fail freezes obsolescent capital in place and impairs creative destruction, the primary means by which output per hour and standards of living are raised, he said.
Of all the regulatory challenges that have emerged out of this crisis, I view the too-big-to-fail problem ... as the most threatening to market efficiency and our economic future.
Greenspan added that he is perplexed by the paucity of new bank formations in the midst of the crisis.
I am puzzled that there has been no evident rush to form new banks. With interest rate spreads so wide, a new bank without a legacy of toxic assets could be quite profitable.
Major investments in new banks could significantly contribute to the recovery of financial intermediation.
(Reporting by Kevin Drawbaugh; Editing by Dan Grebler)