Our guest blogger is Adam Hersh, an economist at the Center for American Progress Action Fund.
In an op-ed in today’s Financial Times, former Federal Reserve Chairman Alan Greenspan proffers a back-handed criticism of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Financial markets are too complex to regulate the way the supporters of Dodd-Frank want, and those markets basically efficient and stable anyway, the Maestro tells us:
The financial system on which Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate. We will almost certainly end up with a number of regulatory inconsistencies whose consequences cannot be readily anticipated. Early returns on the restructuring do not bode well.
As shepherd of the US financial system from 1987 to 2006, Greenspan presided over development of the two largest speculative financial bubbles in the history of the world: the high-tech bubble of the 1990s and the real estate bubble of the 2000s. All the while, Greenspan championed the removal of any regulatory obstacles to Wall Street getting what Wall Street wants.
In retrospect, it is obvious how both Greenspan bubbles have been terribly detrimental to the US economy and the livelihoods of hundreds of millions of families here and around the world. But it was perfectly obvious to many even before the fact that the bubbles would threaten economic meltdowns, disrupting economic growth and destroying jobs, wealth, and the lives of people who had nothing to do with the financial largesse but were nonetheless swept up in the economic wreckage. Either the Maestro didn’t understand what risks an overblown, unbridled financial system posed, or he was a grossly negligent policymaker leading the world’s most important central bank.
Now Greenspan is warning that Dodd-Frank might put finance at risk because lawmakers don’t understand the complexity of the financial system they are trying to regulate. And besides, financial markets aren’t so bad:
With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.
Thanks for the advice Maestro, but no thanks. Actually, it is well understood in the economics research that exchange rates and other financial indicators are less stable now in the age of Greenspan and financial deregulation than in previous decades, and that financial liberalization shoulders much of the blame for this development. As for stable prices and wages, we can thank conservative economic policies (pursued by Greenspan and others) promoting wage stagnation.