Mr. Greenspan Talks

The caption in the Washington Post reads “Greenspan Says He Was Wrong on Regulation.” [WP, Oct. 24, 2008] The former Federal Reserve Board Chairman told Congressional Committee members the “… crisis has shaken his very understanding of how markets work, and agreed that certain financial derivatives should be regulated – an idea he long resisted.”

After his opening comments to the committee Mr. Greenspan argues against regulation and warns Congress that regulation is a threat to economic growth, despite the collapse of derivatives markets this fall.

Greenspan worships free markets so much he forgets that free markets and regulation work together all the time. Take physicians. Physicians are regulated because they have to go to medical school and get a license before they practice medicine. Across America biology students dissect frogs, but without that licensing regulation any one of them could decide they know anatomy so well they can be surgeons, ready to do surgery on you and me.

Regulating doctors lets us be confident they are competent to be physicians; without regulation many would suffer before word got out and free markets acted to eliminate incompetent physicians.

Free markets need equal opportunity and they operate best when we know what we are getting. Regulations requiring equal opportunity, disclosure, honesty and integrity aide and promote the smooth operation of financial markets just as they do in physicians markets.

Remember banks and all financial intermediaries operate with one purpose: to attract the funds of net savers so the savings can be returned to the spending stream by loans to net borrowers. For many years savings accounts, certificates of deposit, stocks, bonds and mutual funds have served the millions in America who save.

Unless Mr. Greenspan will explain what unregulated derivatives can do for America’s economy, which are beyond the established and regulated methods of saving and investing, then we can feel justified that he is arguing against disclosure, honesty, and integrity essential in financial markets.

After the collapse of derivatives markets, and then financial markets, further opposition to regulatory standards gets close to defending secrecy and deception. We would like to think better of Mr. Greenspan, but given his testimony he is making it hard.