Greenspan Warns Against Cost of Buffers Aimed at Limiting Risk

Alan Greenspan, the former chairman of the Federal Reserve, warned governments against seeking to protect their populations from all economic risk, saying such efforts use up capital that would be better employed elsewhere.

“Since the devastating Japanese earthquake and, earlier, the financial tsunami, governments have been pressed to guarantee their populations against virtually all risks,” Greenspan wrote in a piece for the Financial Times published today. “But should they? Guarantees require the building-up of a buffer of idle resources that are not otherwise engaged in the production of goods and services.”

Group of 20 governments and banking regulators have sought to limit the chances of a future financial crisis, in part by forcing banks to hold more capital against possible future losses. That push could end up diverting funds away from more productive uses, Greenspan said.

“Any excess bank equity capital would also constitute a buffer that is not otherwise available to finance productivity- enhancing investment,” he wrote. “If policymakers choose to buffer their populations against every conceivable risk, their standards of living would almost certainly decline.”

Greenspan was chairman of the Federal Reserve between 1987 and 2006.

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net