Greenspan issues stark Fed warning

8 September 2008

Former chairman of the Federal Reserve Alan Greenspan has warned against the central bank being used as a "magical piggy bank".

The economist said that the government's responsibility is to its taxpayers, who might not appreciate large amounts of public funds being used to bail out banks.

He also recommended that the Treasury develops a clearer process for handling bank rescues itself, rather than simply shifting responsibility to the central bank.

Mr Greenspan's statements come in the wake of recent Fed interventions in the failed investment bank Bear Stearns in March.

The firm was eventually taken over by rival bank JPMorgan in a Fed-brokered deal.

"We need laws that specify and limit the conditions for bailouts - laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than circuitously through the central bank as was done during the blowup of Bear Stearns," he commented.

Politicians might now look on the Fed as "a wondrous new font of seemingly costless federal funding - a magical piggy bank," he added.

The new statements come in a new epilogue to the paperback edition of Mr Greenspan's memoir, CNBC reports.

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