Prof. David Nawrocki, the Salisbury professor of economics at Villanova U, writes in response to my interview with Alan Greenspan last week: "I have two major disagreements: Greenspan [when he was Fed chairman] totally ignored the non-bank finance (shadow banking) sector and made no attempt to control their increasing the broad money supply resulting in the bubbles. If you are worried about housing price bubbles, crack down on the mortgage lenders as they facilitate the bubble.
"Secondly, you have these vast organizations of people who earn their living at the organizations like GM, AIG, GE, etc. Why would you destroy these organizations in bankruptcy liquidation [Greenspan's basic advice for non-bank bankrupts] when you can restructure the organization from the top and maintain the stability of the jobs in these organizations? It's harder to build a new organization rather than restructuring an existing organization.
"When these organizations fail, it's not the people at the top who suffer, it's the lower levels who suffer. So throw out the bums at the top, let the shareholders take the loss (they're the ones who allowed management to engage in highly risky policies) and let the people who do the hard work following orders keep their jobs. You also reduce the cascading effects of the failure of a critical linch-pin in the market system, i.e. Lehman in this case.
"I also don't think you fix problems by taking banks to 22% capital ratios from the current 11-12%. I remember when it was like pulling teeth to get banks to 7-8% capital ratios....
"I don't think you can meld behavioral finance with post classical economics. You lose a major assumption critical to post-classical economics -- rational investors."
In response to another question of mine, Greenspan picked "kind of an interesting round about way to disagree with [Philadlephia Federal Reserve President Charles] Plosser. That is, I think he disagreed with Plosser. More Greenspan-speak."