Former Federal Reserve Chairman Alan Greenspan welcomed the recent takeover of Fannie Mae and Freddie Mac, telling CNBC that the government needed "to remove the ambiguity" over whether US would back up the two mortgage giants.
In a live interview, Greenspan reiterated his criticism that the structure of Fannie and Freddie Mac , which have private stockholders but have an implicit government guarantee, "socializes losses while privatizing gains."
This type of institution, he added, "should not exist in a competitive market environment."
Last week, Greenspan said Congress needs to give the government new powers to handle troubled companies to minimize any potential losses to American taxpayers.
A self-described libertarian Republican, Greenspan has a reputation for being wary of giving the government extra powers. (See part two here and part three here.)
However, in crisis situations, there needs to be a clear process for handling bailouts, rather than depending on the Fed to do so, he reckons. A high-level panel of financial officials should be given broad authority to quickly determine whether a failing company poses a sufficient threat to the entire U.S. economy, he recommends. If so, the company would be shut down.
"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," Greenspan wrote in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World."
(The paperback was released today; the hardcover came out last year.)
Greenspan envisions the formation of a group akin to the Resolution Trust Corp. (RTC) to step in, take a troubled company into conservatorship, wipe out the equity, impose some charge or "haircut" on its debts before guaranteeing them and then selling its assets.
—AP contributed to this report.