econ discussion

4/4/22, 6:50 PM Topic: Week 10 Discussion: Banks, regulation and crisis - Canvas - CSU

https://colostate.instructure.com/courses/138100/discussion_topics/1321516 1/3



This is a graded discussion: 15 points possible due Apr 4

208 208

For this week's discussion post, we are going to debate the role of banks in the economy, why the State regulates their activity and how that regulation can prevent or not the occurrence of crisis, using the 2008 financial crisis as our historical example.

On 23 October 2008, a few weeks after the collapse of the US investment bank Lehman Brothers, former US Federal Reserve chairman Alan Greenspan admitted that the accelerating financial crisis had shown him ‘a flaw’ in his belief that free, competitive markets would ensure financial stability. In a hearing of the US House of Representatives Committee on Oversight and Government Reform (https://tinyco.re/7018961) , Greenspan was questioned by the chair of the House Committee, Congressman Henry Waxman:

Chairman Waxman: Well, where did you make a mistake then?

Mr. Greenspan: I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms. And it's been my experience, having worked both as a regulator for 18 years and similar quantities, in the private sector, especially, 10 years at a major international bank, that the loan officers of those institutions knew far more about the risks involved and the people to whom they lent money, than I saw even our best regulators at the Fed capable of doing. So the problem here is something which looked to be a very solid edifice, and, indeed, a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me. I still do not fully understand why it happened and, obviously, to the extent that I figure out where it happened and why, I will change my views. If the facts change, I will change.

Chairman Waxman: Dr. Greenspan, Paul Krugman, the Princeton Professor of Economics who just won a Nobel Prize, wrote a column in 2006 as the subprime mortgage crisis started to emerge. He said, "If anyone is to blame for the current situation, it's Mr. Greenspan, who pooh- poohed warnings about an emerging bubble and did nothing to crack down on irresponsible lending.'' He obviously believes you deserve some of the blame for our current conditions.

10 Week 10 Discussion: Banks and regulation

Logout Close your browser to end your session. (http://www.acns.colostate.edu/single-sign-on-using- shibboleth/#1471272725675-5603b487-ebab)

Faisal Alzneidi

4/4/22, 6:50 PM Topic: Week 10 Discussion: Banks, regulation and crisis - Canvas - CSU

https://colostate.instructure.com/courses/138100/discussion_topics/1321516 2/3

[...]

Mr. Greenspan: I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

Chairman Waxman: In other words, you found that your view of the world, your ideology, was not right, it was not working.

Mr. Greenspan: Precisely. That's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

In this video (https://youtu.be/g_W9SsstO9Y) , Nobel laurate economist Joseph Stiglitz talks about the impacts of that "flaw in the model", which caused a lack of regulation by the Federal Reserve. Which model do you believe that Mr. Greenspan was talking about (relate with the neoclassical, intermediate and Keynesian models of previous discussions)? Why does professor Stiglitz argues that a lack of regulation incentivizes banks to "behave badly"? In the video, Stiglitz talks about the major macroeconomic effects that such "bad behavior" causes; what are some of these effects?

You are then free to comment/agree/disagree with fellow classmates' posts. If you do disagree, please make sure to clearly explain why, and provide all resources at the bottom of the post in APA/MLA formatting.

Important Read the prompt above carefully. Click on “Reply” to write or paste your answer. Longer answers may be easier to write and spellcheck in a Word document first. Your post should be at least 4 sentences long When you have finished entering your answer click on the “Submit” button. You should participate in the discussion board every week. Minimum requirement: You are expected to make your own post and comment on at least one other student’s post.

In your communication with other students, please: Expand on or clarify an important point. Offer an additional argument to support a position taken in an answer. Suggest ways in which an idea could be more clearly expressed. Identify passages where you think the writer misunderstood a concept or applied it incorrectly. Disagree with a point or position made in an answer.

If you disagree with the views of another student, please: Be constructive and respectful. Politely critique a position on an issue, but not the person. Avoid sarcasm, swearing, or language that would be considered rude or argumentative.

4/4/22, 6:50 PM Topic: Week 10 Discussion: Banks, regulation and crisis - Canvas - CSU

https://colostate.instructure.com/courses/138100/discussion_topics/1321516 3/3

Replies are only visible to those who have posted at least one reply.

Search entries or author

 Reply

State precisely the point you disagree with. Offer reasons why you think their view is incorrect and support your position by citing the text or other sources.

Unread  