Bankrupt the Big Banks Now: Greenspan

NEW YORK ( TheStreet) - Ending "Too Big to Fail" and allowing banks to go through Chapter 11 bankruptcy will ensure that economy will get moving again, former Federal Reserve Chairman Alan Greenspan said Tuesday.

In an interview with CNBC's Steve Leisman at the annual conference hosted by industry lobbying group SIFMA (Securities Industries and Financial Markets Association), Greenspan said that one reason the economy was sluggish was because of the misallocation of savings at big banks.

The primary purpose of finance was to "direct savings of the economy to investments in cutting edge technology," said Greenspan. The notion of "Too Big to Fail" has undermined that purpose, with the result that investments in long-term assets have been on the decline.

"Too Big to Fail" is considered shorthand for systemically important financial institutions, or SIFIs, as defined by U.S. bank regulators. Some of the largest SIFIs include the "Big Four" U.S. banks JPMorgan Chase ( JPM), Bank of America ( BAC), Citigroup ( C) and Wells Fargo ( WFC)

Greenspan said he ideally would like banks that are in trouble to file for bankruptcy under Chapter 11. Preventing banks from doing so was preventing "selling climaxes" that quickly get rid of toxic assets and cleanse the financial system.

Greenspan served as Fed Chairman for 18 long years before stepping down in 2006. Many have blamed the economist for his role in the financial crisis, arguing that he kept interest rates low for too long, spurring a housing boom, and that he failed to check the risky lending practices of banks.

Greenspan also strongly favored deregulation, but in the aftermath of the crisis, he has conceded that market forces failed to self-police. He attributed the failure to "human nature that can be improved upon"

But while self regulation might not be the answer, neither is Dodd-Frank, according to the former Chairman. For one, it is difficult to write regulations that presuppose forecasts. "A necessary condition for a financial crisis is very few people expect it," he said.

Moreover, the number of rules needed to be written under Dodd Frank is so daunting, that it is "physically impossible" for regulators, who have to be mindful of unintended consequences, to do the Act within the mandated time frame.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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