Brooksley Born again

In my Oct. 23, 2008, post "Brooksley Born and the Economy of Doom," I told you how the Wall Street meltdown was predicted 11 years earlier by Brooksley Born when she was head of the Commodity Futures Trading Commission. In one Congressional hearing after another, Born tried to explain that unregulated financial instruments called derivatives, which include credit swaps, could bring down the economy. Let me regulate them, she said, or at least require Wall Street investment houses to report how much money they're putting into them. But absent any understanding of what she was talking about, senators and congressmen consulted people they trusted to see what they thought, and those people, led by then-Fed head Alan Greenspan, assured them that the risk was spread out too much to be a problem, and Greenspan in particular told them that Wall Street firms cared too much about their good names to let anything bad happen. By the time I wrote about this in October, Lehman Brothers was bankrupt, several other Wall Street firms were being absorbed by more solvent houses, and Greenspan had publicly apologized for his misjudgment. Greenspan stands out today, not only for his primary role in making Born a Cassandra, but for his manning up to admit he had gotten it wrong. Wall Street executives cared more about their lavish bonuses than about the good names of the institutions they worked for. But he wasn't the only one taking a stand in favor of an unregulated market for derivatives. Clinton advisors Larry Summers and Robert Rubin also told members of Congress that Born was wrong -- indeed that her very warnings could cause a market panic. Texas Senator Phil Gramm, an economist by training, sponsored a bill in 2000 to make it the law of the land that derivatives were not regulated. The bill moved through Congress with Gramm lining up Republican votes and Clinton officials working the other side of the aisle. One of those aides was Gary Gensler, Treasury undersecretary for domestic finance and a former executive of Goldman Sachs. President Obama's nominee for head of the Commodity Futures Trading Commission, the job Brooksley Born did so well or tried to, is...Gary Gensler. Obama has also made Larry Summers his main behind-the-scenes economic advisor. There is an argument in some political circles that Obama needs people with experience to manage the financial crisis, even if they made mistakes in the past. As far as mistakes go, I buy that. Mistakes can make someone smarter later on. But Greenspan and these other guys were driven in part by an almost theological belief in unregulated markets that is unjustified by the facts. They read too much Ayn Rand. They have not recanted their beliefs. They remain heretics, non-believers in the sensibility of basic rules for any game. We need not burn them at the stake, but they have certainly burned us, and so much is at stake in the current economic crisis that I worry what further harm they can do.

Comments

[Dave Smith]

Nice piece. Thanks for the perspective.