Former Federal Reserve Chairman Alan Greenspan slid onto the hot seat on “The Daily Show” Monday night to explain how he and other regulators failed to foresee the economic meltdown.
“The simple premise that we all made was that people would act rationally in their long-term self-interest made a huge impact on how you viewed how the economy was going to function,” Greenspan explained to Jon Stewart.
Trying to get to the root causes of the crisis — and presumably to rehabilitate an image badly scarred by the near collapse of the financial system — inspired Greenspan to write his new book, “The Map and the Territory,” which examines the country’s recent economic history.
Stewart asked Greenspan why he wasn’t more concerned about compensation systems at top financial firms that rewarded risky bets.
“The system was incentivized for these crazy short-term bursts of rewards,” Stewart noted.
“You couldn’t believe that there would be people that would be that disregarding of their own companies,” Greenspan explained.
Greenspan said there were steps that could be taken to guard against a future catastrophe and stressed the need for banks to be better capitalized. If they had more capital reserves, regulators would not have to be unduly concerned about the intricate investment models whiz-kids on Wall Street create.
“If they regulate the capital than you care far less about the other things that they’re going to do — and you can’t even imagine the things that will occur — but if you have enough capital in there you don’t care,” Greenspan said.
But he remained pessimistic that the financial sector will take his advice.
“The banks don’t want to raise capital because it’s costly in the short term,” Greenspan noted, before apologizing for going too far into the weeds of economic policy.
“You know whose here tonight? All masters students in economics,” Stewart joked.
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