'This Week' Transcript: NEC Director Larry Summers

GREENSPAN: Possibly. I don't know that. But I do know that the probability that it might be is much higher than we would like.

TAPPER: You have said recently that if institutions are too big to fail, they're too big. Do you support the Volcker rule, which would limit some of the transactions that commercial banks can do?

GREENSPAN: Well, I think the point that he is making, that deposit funds which are subsidized should not be employed for speculative purposes, I would agree with. The problem basically with the Volcker rule is it's very difficult to apply in a general way, and I think that's why there's been considerable resistance to it, not the principle, but the issue of being able to segregate the types of transactions which are helping customers and those which are strictly proprietary. Until they do that, I think it's very difficult to implement.

TAPPER: You'll be testifying about the financial crisis on Wednesday before the Financial Crisis Inquiry Commission. When you testified before Congress in October, you said that you finally saw a flaw in -- in the way that you looked at markets, that markets cannot necessarily be trusted to completely police themselves.

But isn't it -- isn't it more than a flaw? Isn't it an indictment of Ayn Rand and the view that laissez-faire capitalism can be expected to function properly, that markets can be trusted to police themselves?

GREENSPAN: Not at all. I think that there is no alternative, if you want to have economic growth and higher standards of living, in a democratic society, to have competitive markets. And, indeed, if you merely look at the history since the Enlightenment of the 18th century, when all of those ideas surfaced and became applicable in public policy, we've had an explosion of economic growth, and especially in the developing countries, where hundreds of millions of people have been pulled out of poverty, of extreme poverty and starvation, basically because we have competitive markets.

So it's not the principle of competitive markets which really has no alternative which works. It is a strict application -- as I presented in a Brookings paper fairly recently on a somewhat technical area, the major mistake was assuming what the nature of risk would be. And the reason it was missed is we have had no experience of the type of risks that arose following the default of Lehman Brothers in September 2008.

That's the critical mistake. And I made it. Everybody that I know who works in this business made it. And it means that basically we have to work our way back to understanding what went on. And as I argue, what we need is far more required capital for financial institutions than we've had.

TAPPER: There's -- as you know, Michael Bury (ph), who is a hedge fund manager in California, who made a lot of money looking at the subprime mortgage situation in the previous years and -- and saying to himself, "This is crazy. It can't continue," and he bet against it and made a lot of money, you were asked about it last month, and you referred to him as a statistical illusion.

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