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Both government and private sectors firms proved to be inadequate in this regard, and a case in point is the failure of the Federal Reserve under Alan Greenspan.The Federal Reserve under Greenspan was operated by the will of one rather than by a system of checks and balances.A firm’s leadership also largely determines the firm’s performance and its ability to meet its goals.In recent months, developed economies around the world experienced an unprecedented shock – credit markets froze up, equity markets tumbled to record lows and major banks failed and whole countries were on the brink of default.Transparency is another important aspect of good governance.Governments have access to a vast amount of important information.
Consumers are at fault for over-borrowing, banks are at fault for over-lending, investment banks are to blame for over-securitizing, and regulatory institutions are at fault for allowing this excessive behaviour.At some level, the leadership at the public and private institutions that has been involved in this crisis are being held accountable – top executives at these banks are being questioned and will be missing out on some of their bonuses; Greenspan is being called into question for his lax oversight of the markets.But perhaps this call for accountability is a case of too little, too late.(Or at least that’s what they’re supposed to do.) Systems of governance affect the performance of the state in executing its core functions and through this, the performance of countries in meeting their major economic and social goals.In the private sector, the same concept applies – firms’ leadership enables the functioning of various departments and is responsible for the welfare of the firm’s employees.
Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford. Reliability requires governance that is free from distortionary incentives – through corruption, nepotism, patronage or capture by narrow private interest groups.