Maestro Nurtures a New Too-Big-to Fail Crisis

Simon Johnson on Greenspan:

His latest writing says the problem with the U.S. economy today is an excess of government “activism.” If only, he says, the government would back off, firms would become more willing to use their cash hoards to increase investment spending and hiring.

But Greenspan today ignores the more brutal reality: We are still experiencing the aftermath of a major financial crisis and this time isn’t different at all, as any reader of Kenneth Rogoff andCarmen Reinhart knows. Our situation is simple and sadly classic. Policy makers, led by Greenspan, allowed the financial system to become dangerous and, in some key aspects, out of control. The recovery is similar to those following almost all financial crises: When part of the financial system fails, the rest comes back only through active resuscitation.

Of course, the major questions for private industry are: Will credit collapse again, and what happens when the Fed steps back from supporting markets?

Greenspan’s argument is insidious. But this isn’t about free-markets, in the sense that all participants can fail without getting any kind of bailout. Many smart people are working hard to become or to remain too big to fail. And Greenspan is again urging us into another damaging cycle.