Yesterday, in discussing FDIC chair Sheila Bair's affection for derivatives, I wrote that a quick way to get marginalized during the Clinton administration was to come out hard in favor of increased financial regulation.
Case in point: Brooksley Born, former head of the Commodity Futures Trading Commission. Born - unlike Bair, who had held the same post early in the Clinton administration - pushed for regulation of derivatives and was very outspoken about the problems she perceived. She was met with fierce opposition from other regulators, specifically Fed chair Greenspan, Treasury Secretaries Rubin and Summers, and SEC chair Levitt.
Over the past week Born's story has received coverage in the New York Times and the Washington Post. Both pieces make it clear that Born was up against a Wall Street boys club that was disdainful of her and looked on her as an outsider. Their arguments against regulation were extremely weak, so they defeated her agenda by ganging up on her, and she quit in 1999.
It's amazing, the ease with which the good ol' boys get away with swiss cheese arguments while dismissing their opponents as irrational, hotheaded, unnecessarily combative. (Rubin: "If you want to move forward...you engage with parties in a constructive way. My recollection was, though I truly do not remember the specifics of the meeting, this was done in a more strident way.")
Rubin and Summers are frequently lauded by admiring journalists for their inquisitive approach to problem-solving, as if they approach problems objectively and let their master intellects guide them to the right answer. How, then, could they make their case with arguments like this:
Born didn't back off on derivatives, either. On May 7, 1998, two weeks after her April showdown at Treasury, the commission issued a "concept release" soliciting public comment on derivatives and their risk.
The response was swift and blistering. Within hours, Greenspan, Rubin and Levitt cited their "grave concerns" in an unusual joint statement. Deputy Treasury Secretary Lawrence Summers decried it before Congress as "casting a shadow of regulatory uncertainty over an otherwise thriving market."
This is what I'm talking about when I say these folks were intellectually dishonest. As an economist, Summers really should have known something about boom-bust cycles, speculation, and the potential for profitable fraud and abuse in a system where there is no regulatory oversight. His argument rests on the fallacy that a "thriving" market - in terms of profits, trading volume, etc. - is also a safe and healthy one.
Of course he knew these things, but he chose to ignore them. Expediency, ambition, and solidarity guided him to his conclusions; he acted out of a serious compulsion to help out powerful friends and allies that is called "cronyism" and "corruption" in most other countries.
Rubin's argument is similarly weak:
Privately, Rubin had expressed concern about derivatives' unruly growth. But he agreed with Greenspan and Levitt that these newer contracts, often called "swaps," weren't exactly futures. Born's agency did not have legal authority to regulate swaps, the three men believed, and her call for a discussion had real-world consequences: It would cast doubt over the legality of trillions of dollars in existing contracts and create uncertainty over how to operate in the market.
The legal authority argument is bogus. The whole problem with derivatives was that the law hadn't yet caught up to them, so they were largely free of regulation. None of these regulatory bodies really had "legal authority" to oversee derivatives: there was nothing on the books yet! The logic is laughable.
That's the thing about the supposed inquisitiveness of Rubin and Summers - they perform intellectual gymnastics so that they can better serve powerful interests. It's all about sounding smart drawing conclusions that are self-serving and absolutely ridiculous. Truly silly. And convincing yourself that you're right. (But at least Rubin can be intellectually honest in private.)
Also, on the second part of the argument: Born repeatedly asserted that new regulations would only cover new contracts, but Rubin parrots the industry lobby line about they would create problems for existing contracts. Of course, a little bit of "uncertainty" in this market would have been much preferable to the certainty of the cowboys taking insane risks that the public is now paying for.
I wonder if this story has anything to do with all this?