Greenspan Concedes Error on Regulation

from Riané de Bruyn:

http://www.nytimes.com/2008/10/24/business/economy/24panel.html

There is a saying that everything that goes up must come down eventually and Alan Greenspan managed to postpone the fall of the economic boom for some time, but the fall became increasingly harder. It is ironic that people choose to believe that central banks have control over the whole economy and can control it like a puppet if they wish to do so. Yes monetary policy is a very strong instrument, like Friedman said, to use in the economy but nothing is fool proof and the crisis proved it. I agree with Alan Greenspan that there is too little regulation or no regulation in the debt market. In another article Greenspan said that the financial markets became too complex to fully understand and analyse which is true since the financial markets in the world are closely integrated and monetary policies are not independent of other countries anymore, which makes monetary policy models very complex and almost impossible to accurately estimate.

Although they blame Greenspan for the crisis and that he aggravated the situation by ignoring the signs, it is in my opinion that it would not have helped to curb the crisis but it would have only made it not as extensive as it is. It is clear that the stock markets cannot function independently and without regulation as Greenspan blames Wall Street for the crisis, which makes sense. There is no regulation or control over the selling of debt on the stock market. Thus I think that in the future the central bank should exercise more control over debt, thus the market of debt. It is obvious that debt and interest rates are closely linked and it makes logic sense that the central bank should be able to control the interest rate together with regulating the debt market, thus having control over the “missing link” in the market.

We have talked only a little about the role of regulation in providing financial stability. This article expand on the topic which is now the big issue in international policy making. Thank you.