Alan Greenspan's testifying today to the commission that's supposed to unravel the financial crisis. His basic message: Regulators can't predict market meltdowns. But it's possible to put in place a couple rules that make the financial system more likely to survive the next crisis.
In his prepared testimony, Greenspan says:
Regulators who are required to forecast have had a woeful record of chronic failure. History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be.
But, he says, regulators can create rules that "make the financial system more resilient in the face of inherently unforeseeable shocks." And he lists two "primary imperatives" toward that end:
1. Require banks to hold more money as a cushion against losses. And make them hold it in a form that can accessed even during a crisis (as opposed to buying types of bonds that may be difficult to sell). In Greenspan's terms: "increased risk-based capital and liquidity requirements."
2. Require all companies — not just banks — to post more collateral in trades of financial products such as derivatives. That would reduce what's known as counterparty risk — the risk that the company on one end of a deal won't be able to pay up when the time comes. In Greenspan 's terms: "significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades."
The crisis commission is holding a few days of hearings this week on housing and the crisis; they'll also be hearing from former officials from Citigroup, and Fannie Mae.
For more Greenspan, check out his recent paper that said, among other things, that the housing bubble wasn't his fault.