Our former regulators speak. In The Wall Street Journal Tuesday, former Securities and Exchange Commission chief Arthur Levitt weighs in on the ongoing crisis, particularly on what even Levitt seems to think is ill-timed and misbegotten actions by regulators, including the SEC, in response to the mess. And Monday in the Financial Times, former Federal Reserve Chairman Alan Greenspan unspooled his characteristically wandering prose to, well, argue the same point, though from a very different ideological location.
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Levitt wants everyone to calm down. He argues against the scheme to make the Fed an uber-regulator, insisting that the central bank will favor its traditional constancy, the banks, while ignoring the SEC's usual clients, investors. He pours contempt on the SEC's anti-shorting jihad, calling it "experimental medicine." And he wants a renewed effort at disclosure and transparency. While that first point has merit, it does reveal how our financial regulatory system devolves to a kind of interest-group politics. And what's most interesting here is the group that's left out -- corporations -- though Levitt may figure investors subsume the corporate sector as owners. More problematic is Levitt's faith in transparency. What we've learned over the past decade or so, since Levitt's tenure in fact, is how difficult viable transparency and disclosure has become in a complex, integrated global market system. There's a deep connection between disclosure and risk management; the latter is an interpretation of the former. And if we've learned anything from the subprime crisis, it's that the rot infects both of them. More is not necessarily better.
But the heart of Levitt's essay is a startling admission: Regulators can't really do much about markets that are, in the immortal words of Greenspan, prone to "irrational euphoria." In other words, not only can't regulators do much about bubbles, they shouldn't. "How can a regulator 'decide' that the market is too high?" writes Levitt. "That it is just a bubble? They can't -- no one can."
Greenspan agrees. He's been saying it for years. And in the FT he says it again, chasing it to a place that chills the soul. Greenspan's essential argument comes down to this: Globalization has driven market capitalism over the past decade or so, outpacing world real GDP, and creating great wealth. The danger of this crisis is the political fallout that impairs the globalization project. Why the crisis? "The cause of our economic despair, however, is human nature's propensity to sway from fear to euphoria and back again, a condition no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today's crisis, has never been able to eliminate history's crisis."
Whoo. What are you saying here Al, besides it's not your fault? Are you saying that the job title of "market stabilizer" is a crock? That an anti-shorting campaign is beyond idiotic? That it's useless to rein in predatory mortgage lending? That regulating derivatives, if only through a clearinghouse, is meaningless? What he's suggesting is that if investors were more rational -- and not so prone to emotion -- markets would proceed serenely. Of course that's a pipe dream. So here's the deal: It's the hoi polloi's fault, but they can't do anything about it because they operate in a world of inevitable cosmic forces: They are both powerful and completely powerless. Moreover, Greenspan (and Levitt to a certain extent) sets up a kind of straw man. No one is saying markets should not go up and down. But, whether because Man is a fallen creature (in an Ayn Rand sense) or not, markets are impefect and can easily spin themselves off into bubbles, dislocations and breakdowns, particularly in an age of financial innovation and globalization. One point of regulation would seem to be to attempt to rein those excesses in -- by reducing leverage, by trying to inject sanity into affairs -- much as the Fed raises interest rates when the money supply gets out of hand. But both former regulators say that can't be done with the markets, leaving us naked to the powerful forces that sweep over us.
This is, to say the least, a political, not economic, problem. The fact is, it can be done -- but at a political cost that neither man seems willing to shoulder or believe anyone else would take on. Regulators can bring markets down when they're overheating, but at the risk of bucking a powerful conventional wisdom, starting with Congress, which has never met a boom it didn't like. It means regulators, ala Paul Volcker, need to make some terribly painful decisions occasionally. It also means that at times, markets need to be constrained, something Greenspan in particular views as an anathema. But Greenspan is caught in a trap of his own making. Act and get punished politically. Don't act and trigger a political backlash that threatens globalization and creates a bigger mess in the markets than the original crisis. These are our wise men? - Robert Teitelman
Comments
Robert,
Greenspan is 100% correct here. Regulation usually make things worse rather than better.
Look at history and the facts not what you wish was possible.
Roger