Why does what Greenspan says frighten you? I think he's laid it out very well. He's talking about the problem known as "moral hazard" - and reminding us that investments are not protected by FDIC.
>>Indeed, if the government protects all creditors, or is generally believed to protect all creditors,
the other efforts to reduce the costs of the safety net will be of little benefit. The implications are
similar if the public does not, or cannot, distinguish a bank from its affiliates. As financial
consolidation continues, and as banking organizations take advantage of a wider range of
activities, the perception that all creditors of large banks, let alone of their affiliates, are protected
by the safety net is a recipe for a vast misallocation of resources and increasingly intrusive
supervision.
In conclusion, let me state the obvious. The purpose of banking, finance, and intermediation is to
facilitate the production and trade of goods and services. Standards of living rise when the cash
flows from obsolescent, low-productivity capital are employed to finance newer, cutting-edge,
technologies--the process that Joseph Schumpeter many decades ago labeled "creative
destruction."
Financial markets best serve this process if market forces are given free rein. Yet society's
willingness for this process to go wholly unchecked is limited, especially for financial institutions.
The perceived value of stability has countered the advantages of raw competitive creative
destruction. While valuing the benefits of stability that the safety net confers, we nonetheless need
to recognize that the benefits are not without cost. In this context, reform of the safety net must
remain on the agenda. I believe this means being very cautious about purposefully or inadvertently
extending the scope and reach of the safety net. It also means supervisory reform to create, as
best we can, inducements to bank behavior similar to those that would exist with no safety net.
And, it means, I think, that there be a presumption that uninsured claimants are at risk.<<
federalreserve.gov
This applies, for example, to money market funds. You should be nervous - that's what he's telling you - if you're nervous, you'll be prudent rather than complacent.
He always has a reason for saying things. Suddenly, I feel more motivated than ever to get out of the money market. |
