A critique of Alan Greenspan’s retrospective on the crisis
Alan Greenspan’s paper (March 2010) presents his retrospective view of the crisis. His theme has several parts. First, the housing price bubble, its subsequent collapse, and the financial crisis were not predicted either by the market, the Fed, the IMF, or the regulators in the years leading to the current crisis. Second, financial intermediation tried to function on too thin layer of capital – high leverage – owing to a misreading of the degree of risk embodied in ever more complex financial products and markets. Third, the breakdown was unpredictable and inevitable, given the “excessive” leverage – or low capital – of the financial intermediaries. Greenspan now focuses on desirable capital requirements for banks and financial intermediaries. Too high a capital requirement will not provide a sufficiently high rate of return on financial assets to attract capital. Too low a capital requirement unduly raises risk and endangers bank solvency. The Fed, IMF, the Treasury, and the market lacked the appropriate tools of analysis to answer the following questions: what is an optimal leverage or capital requirement that balances the expected growth against risk? What are theoretically founded early warning signals of a crisis? I explain why the application of stochastic optimal control (SOC)/dynamic risk management is an effective approach to determine the optimal degree of leverage, the optimum and excessive risk, and the probability of a debt crisis. The theoretically derived early warning signal of a crisis is the excess debt ratio, equal to the difference between the actual and optimal ratio. The excess debt starting from 2004-05 indicated that a crisis was most likely. This SOC analysis should be used by those charged with surveillance of financial markets.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Volume (Year): 30 (2010)
Issue (Month): ()
|Contact details of provider:|| Postal: 120 Broadway, 29th Floor New York, NY 10271|
Phone: +1 212 284 8600
Web page: http://www.capco.com/
When requesting a correction, please mention this item's handle: RePEc:ris:jofitr:1506. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Springett)
If references are entirely missing, you can add them using this form.