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

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This is a graded discussion: 15 points possibledue Apr 4

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For this week's discussion post, we are going to debate the role of banks in the economy, why theState 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 financialcrisis had shown him ‘a flaw’ in his belief that free, competitive markets would ensure financialstability. In a hearing of the US House of Representatives Committee on Oversight andGovernment Reform (https://tinyco.re/7018961) , Greenspan was questioned by the chair of theHouse 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, specificallybanks and others, were such that they were best capable of protecting their own shareholdersand their equity in the firms. And it's been my experience, having worked both as a regulator for18 years and similar quantities, in the private sector, especially, 10 years at a major internationalbank, that the loan officers of those institutions knew far more about the risks involved and thepeople 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 criticalpillar to market competition and free markets, did break down. And I think that, as I said, shockedme. I still do not fully understand why it happened and, obviously, to the extent that I figure outwhere 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 whojust won a Nobel Prize, wrote a column in 2006 as the subprime mortgage crisis started toemerge. 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 irresponsiblelending.'' He obviously believes you deserve some of the blame for our current conditions.

10 Week 10 Discussion: Banks and regulation

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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 thatdefines how the world works, so to speak.

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

Mr. Greenspan: Precisely. That's precisely the reason I was shocked, because I had been goingfor 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 talksabout the impacts of that "flaw in the model", which caused a lack of regulation by the FederalReserve. Which model do you believe that Mr. Greenspan was talking about (relate with theneoclassical, intermediate and Keynesian models of previous discussions)? Why does professorStiglitz argues that a lack of regulation incentivizes banks to "behave badly"? In the video, Stiglitztalks about the major macroeconomic effects that such "bad behavior" causes; what are some ofthese 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 inAPA/MLA formatting.

ImportantRead the prompt above carefully.Click on “Reply” to write or paste your answer. Longer answers may be easier to write andspellcheck in a Word document first. Your post should be at least 4 sentences longWhen 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 leastone 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

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