If there is a silver lining to the collapse of our financial markets perhaps it is a chance to put the brakes on the GOP’s manic obsession with deregulation. For years I’ve bemoaned the effects of The Telecommunications Act of 1996, signed by President Clinton which deregulated broadcasting, allowing multiple ownerships that created the corporate monopoly of public airwaves. Regulations on broadcasting were vital to ensuring diversity in ownership and thus diversity of opinion and programming. By tearing down the walls that separated commerce from the rights of the people to have equal access to public airwaves, the United States Government essentially sold the public airwaves to the highest bidder and the American public lost out.

Radio broadcasting has been especially hard hit by deregulation. Tens of thousands of jobs were lost over the last 12 years during the flurry of mergers and acquisitions that created giant broadcasting companies like Clear Channel and Viacom. Some of these monopolies are being broken up and sold now that the easy money is gone but the damage is done. The talent pool has gotten smaller and shallower because of syndicated programming, voice tracking and the disappearance of small single owner stations that were vital in providing job opportunities for young broadcasters.

Sadly deregulation has now brought our financial system to its knees. There are many factors involved in our current mess, many of them so complicated I don’t understand them and can’t explain them. But the primary factors include deregulation which allowed the financial markets to run free and unfettered.

Derivatives are a huge part of the problem. NY Times financial reporter Peter S. Goodman provides an understandable explaination,”Derivatives were created to soften or ‘hedge’ investment losses. For example some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes. On a grander scale, such contract s allow financial services firms and corporations to take more complex risks that they might otherwise avoid-for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.”

In the October 9^th edition of the NY Times, Mr. Goodman writes about some unsung heroes in the battle over financial regulation. There were some economists and others who spoke out about the problems with derivatives and the need for federal oversight to protect the financial system. Alan Greenspan forcefully pushed these critics aside and since the long time now retired Chairman of the Federal Reserve was held in such high esteem by those in power, he was permitted to have veto power over these efforts to constrain powerful market forces. For his part Greenspan is unrepentant about his tenure at the Fed and his support of deregulation and a free market system. In a recent speech at Georgetown University he argued ‘that the problem wasn’t that the contracts failed, rather the people using them got greedy. A lack of integrity spawned the crisis.” Mr. Greenspan’s critics take a different view. Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation said, “Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives. “

Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University had this to say about Greenspan, the man that many refer to as the Oracle, “Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury…I think of him as consistently cheerleading on derivatives.”

For those who wonder if there were folks who predicted the impending financial crisis and why they didn’t speak up, I present to you courtesy of Mr. Goodman’s research, Edward J. Markey, a Democrat from Massachusetts, who led the House subcommittee on telecommunications and finance. In 1992, he asked the General Accounting Office to study derivatives risks. Two years later their report identified “significant gaps and weaknesses” in the regulatory oversight of derivatives. According to the NY Times, Charles A Bowsher, head of the GAO had this to say in testimony before Mr. Markey’s committee in 1994…”The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole.” Mr. Browsher’s foresight about our present situation would seem to entitle him to assume the title of the Oracle. In contrast, at the same hearing, Mr. Greenspan brushed aside the risks, “Risks in financial markets including derivatives markets are being regulated by private parties…There is nothing involved in federal regulation per se which makes it superior to market regulation.” Guess Greenspan didn’t foresee a lack of integrity or the overwhelming greed that would overtake these private parties.

Mr. Markey introduced a bill requiring greater derivatives regulation in 1994. It failed.

There was another Oracle that spoke out about the need for federal regulation in 1997, Brooksley E. Born, the chairwoman of the Commodity Futures Trading Commission (C.F.T.C). Born was reportedly concerned “that unfettered opaque trading could threaten our regulated markets or indeed our economy without any federal agency knowing about it.” In Congressional testimony, she called for greater disclosure of trades and reserves to cushion against losses.” Born’s concern reportedly prompted fierce opposition by both Alan Greenspan and then Treasury Secretary Robert Rubin. Treasury lawyers reportedly concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street. Michael Greenberger, senior director at the commission, said, “Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis.”In the face of so much opposition, Born departed the commission in 1999. In November 1999, Mr. Goodman reports that senior regulators including Mr. Greenspan and Mr. Rubin recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives. Congress agreed.

In 2000, Senator Tom Harkin, Democrat from Iowa, wondered what might happen if Congress weakened the C.F.T.C’s authority over derivatives,” If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing. Mr. Greenspan replied that Wall Street could be trusted. Then Rep. Bernard Sanders, an independent from Vermont voiced doubts, “Aren’t you concerned with such growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact t on the national and global economy?” “No, I’m not,” Mr. Greenspan replied, “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically-I should say, fully-hedged.” The House passed the bill that kept derivatives clear of C.F.T.C. oversight, Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000 page appropriations bill, the Senate passed it and President Clinton signed it into law.

In 2003, Warren Buffett sounded the alarm, “Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers…The troubles of one could quickly infect the others.”

When there was talk of a housing bubble which threatened consumers, Mr. Greenspan brushed aside the threat. Mr. Goodman reports that derivatives were the common thread that bound together mortgage companies, Wall Street firms, banks and insurance companies like AIG, serving to infect all with the high risk ventures.

Keep this in mind, Senator John McCain’s chief economic advisor was Phil Gramm the maestro of financial deregulation, McCain up until a month ago called himself a committed deregulator, he advocated for deregulation of health care! Warren Buffett has endorsed Barack Obama for President. No word on who Brooksley Born is backing but…I’m thinking it wouldn’t be John McCain.

Update October 27, 2008

Alan Shrugged
In a historic moment, former Fed chair Alan Greenspan acknowledged he had been wrong for years to assume that government regulation was bad for markets. Whoops—there goes decades of Ayn Rand down the drain.” />

David Corn” />
October 24” /> , 2008” /> In a congressional hearing room on Thursday, former Fed Chairman Alan Greenspan, one of the most influential civil servants of the past century, saw his stock plummet—and his entire career lose its moorings. More important, the ideological battle over economic theory and the role of government in markets—a fight that has played out in the current presidential campaign—took a historic turn.

With members of the House oversight and government reform committee blasting Greenspan for his past decisions that helped pave the way for the current financial crisis, he acknowledged that his libertarian view of markets and the financial world had not worked out so well. “You know,” he told the legislators, “that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.” While Greenspan did defend his various decisions, he admitted that his faith in the ability of free and loosely-regulated markets to produce the best outcomes had been shaken: “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”

In other words, whoops—there goes decades of Ayn Rand down the drain.

Democrats on the committee made Greenspan eat ideological crow. And after the hearing, Democratic Senator Dianne Feinstein of California released letters Greenspan had written to legislators in 2002 and 2003 that now cast the former chief banker as out of touch with financial reality.

Back then, Feinstein was pushing for regulating financial instruments known as derivatives—particularly those called swaps. In 2000, Republican Senator Phil Gramm, then the chairman of the Senate banking committee, had used a sly legislative maneuver to pass a bill keeping swaps free from federal regulation. (Lobbyists for financial firms had helped to write the bill.) The swaps market subsequently exploded, as financial firms bought and sold swaps as insurance to cover their trading in subprime securities and other freewheeling financial products. In a nutshell: the rise of unregulated swaps enabled the growth of the shaky subprime securities at the heart of the current financial crisis. Greenspan was an ardent supporter of keeping swaps virtually unregulated.

In 2001, Enron, having gone crazy with energy derivatives, collapsed—after the firm had manipulated the California electricity market, costing residents of Feinstein’s states billions of dollars. Following that fiasco, Feinstein decided the derivatives market needed to be reined in. As The Wall Street Journal reported in 2004, “When she telephoned Mr. Greenspan for support, he declined, telling her the proposal threatened the multitrillion dollar derivatives industry, which he considers an important stabilizing force that diffuses financial risk.”

In September 2002, Greenspan, Treasury Secretary Paul O’Neill, Securities and Exchange Commission chairman Harvey Pitt, and Commodity Futures Trading Commission chairman James Newsome wrote a letter to members of Congress to note their opposition to legislation that would regulate derivatives. They wrote:

We believe that the [over-the-counter] derivatives markets in question have been a major contributor to our economy’s ability to respond to the stresses and challenges of the last two years. This proposal would limit this contribution, thereby increasing the vulnerability of our economy to potential future stresses….

We do not believe a public policy case exists to justify this governmental intervention. The OTC markets trade a wide variety of instruments. Many of these are idiosyncratic in nature….

While the derivatives markets may seem far removed from the interests and concerns of consumers, the efficiency gains that these markets have fostered are enormously important to consumers and to our economy.

Greenspan and the others urged Congress “to be aware of the potential unintended consequences” of legislation to regulate derivatives.

They got it exactly wrong. Swaps and derivatives ended up undermining, not bolstering, the economy.

Feinstein was not convinced by Greenspan’s argument, and she continued to press for legislation to regulate swaps. And Greenspan continued to resist. In a June 11, 2003 letter—also signed by the new Treasury secretary. John Snow, the new SEC chairman, William Donaldson, and CFTC chairman Newsome—Greenspan praised derivatives and called them an essential part of the economy:

Businesss, financial institutions, and investors throughout the economy rely upon derivatives to protect themselves from market volatility triggered by unexpected economic events. This ability to manage risks makes the economy more resilient and its importance cannot be underestimated. In our judgment, the ability of private counterparty surveillance to effectively regulate these markets can be undermined by inappropriate extensions of government regulations.

They were asserting that government regulation undercuts market-driven self-regulation. But as events have demonstrated, unregulated swaps did not protect Big Finance firms; they weakened the entire financial industry in the United States and overseas.

In a November 5, 2003 letter, signed only by Greenspan, the Fed chair again took a shot at Feinstein’s proposal to control derivatives. He noted that “enhanced market discipline” would address concerns about the manipulation of markets.

Before the oversight committee, Greenspan said that he had been “partially” wrong to believe that swaps did not need regulation. But he did seek cover by claiming he had not been alone in screwing up: “The Federal Reserve had as good an economic organization as exists. If all those extraordinarily capable people were unable to foresee the development of this critical problem…we have to ask ourselves: Why is that? And the answer is that we’re not smart enough as people. We just cannot see events that far in advance.”

But not everyone got it wrong. In the late 1990s, regulators at the CFTC wanted to regulate swaps. Gramm, Greenspan and others—including senior members of the Clinton administration—did not. Following the Enron debacle, Feinstein took a run at this. But Greenspan and Bush administration officials said no. And it was not an issue of smarts; it was a matter of ideology.

In fact, it was always a matter of ideology for Greenspan, a libertarian champion. In 1963, writing in Rand’s “Objectivist” newsletter, he noted, “It is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.” Regulation, he maintained, undermines this “superlatively moral system.” Self-governance by choice, he said, would be more effective than governance through government. Regulation, Greenspan maintained, was the enemy of freedom: “At the bottom of the endless pile of paper work which characterizes all regulation lies a gun.”

Well, it turns out that at the bottom of the system that Greenspan oversaw for years, there was nothing but a pile of bad paper. And testifying to the House oversight committee, Greenspan, one of the more ideological Washington players of the past few decades, essentially said that Ayn Randism had let him—and the entire world—down. It was truly a God that failed.

David Corn is Mother Jones’ Washington bureau chief.

http://www.motherjones.com/washington_dispatch/2008/10/alan-greenspan-regulation.html

Alan Greenspan The Master of Disaster:

http://www.huffingtonpost.com/2009/02/19/alan-greenspan-the-oracle_n_168168.html