The Times tells the story of the failed efforts of one Brooksley E. Born, the chair of the Commodities Futures Trading Association in 1997, to attempt to impose greater regulation on derivatives. “She called for greater disclosure of trades and reserves to cushion against losses.” She was fiercely opposed in this by Alan Greenspan and Robert Rubin. [ed:spelling corrected]
Rubin now says that “he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury. ‘All of the forces in the system were arrayed against it,’ he said. ‘The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.’” This is somewhat less than credible. Larry Summers, Rubin’s deputy, called Born and “chastised her for taking steps he said would lead to a financial crisis.” And “On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations.” A year later, “they recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.” This sure doesn’t sound like someone who was pressing against public opinion in an effort to institute greater oversight.
But Greenspan is the more interesting case. In a speech at Georgetown Law School on October 2, against a background of boilerplate about the wonders of the free market, he argued [pdf]:
Another important requirement for the proper functioning of market competition is also not often, if ever, covered in lists of factors contributing to economic growth and standards of living: trust in the word of others… In a market system based on trust, reputation has a significant economic value. I am therefore distressed at how far we have let concerns for reputation slip in recent years… During the past year, lack of trust in the validity of accounting records of banks and other financial institutions in the context of inadequate capital led to a massive hesitancy in lending to them. The result has been a freezing up of credit.
Okay, so he thinks that Born’s proposal (or something like it) a decade ago – “greater disclosure of trades and reserves” – would have prevented the erosion of trust, right? Not exactly. The Times quotes Greenspan thusly: “Governments and central banks could not have altered the course of the boom.” Or, presumably, the bust.
G.A. Cohen – critical of Rawls’s institutional focus – is sometimes accused of being exclusively concerned with the ethos of a society and individual behavior, rather than the background institutional structure within which individuals act. In his new book, he denies this – both are important for justice, he says. Unlike Cohen, Greenspan really does seem to be blaming the market participants rather than the regulatory regime – market players should have been more concerned about their reputations. As the Times article summarizes his view, traders “got greedy” and sacrificed their “integrity.” I’m pretty sure Greenspan, the Ayn Rand acolyte, wouldn’t quite put it this way, but still, he holds that no institutional changes could have altered the outcome.
At the same time, of course, he holds that now there’s plenty for the government to do in cleaning up the mess that irresponsible individuals have produced: “the federal government must take aggressive steps to protect workers and businesses from the harmful effects of a financial crisis. The great majority of those deserving this protection had no role in causing the crisis.” Hmm. I thought market transactions weren’t supposed to harm innocent third parties. But when they do, self-professed libertarians “urgently advocate immediate, extensive action that would … prevent a serious economic contraction.” But not, apparently, greater disclosure on market transactions.