While The Federal Reserve Slept
Binya Appelbaum had a great piece on Sunday explaining the Federal Reserve's disastrous reluctance to regulating subprime mortgages. The key moment here came in 2000, when Ed Gramlich, one of the Reserve's 12 governors, directly asked Alan Greenspan to regulated the subprime market. "Greenspan said that he disagreed with Gramlich," reports Appelbaum, "telling him that such inspections would require a vast effort with no certainty of results, and that the Fed's involvement might give borrowers a false sense of security."
Put simple, Greenspan's logic was that the Federal Reserve should not regulate because regulation might not turn up wrongdoing, and if it did turn up wrongdoing, it might not be able to correct it. "In hindsight, both of these reasons are ludicrous," comments Felix Salmon. "Policework, by its very nature, involves a lot of effort and no certainty of results. That doesn’t mean there shouldn’t be any policing."
But then, there's something vaguely tautological about saying the revered Chairman of the Federal Reserve did not attack his bubble. After all, if Alan Greenspan, a regulator we literally nicknamed "The Maestro," had devoted himself to speaking out against the bubble, there likely would have been no bubble, and thus no pop, and thus no stories.
This continues to be my question about financial regulation: what do you do if the Chairman of the Federal Reserve doesn't want to regulate? Much of the discussion focuses on providing regulators with the appropriate tools, but I'm much more interested in the portions of the package that are automatic -- that work even when the rest of us are convinced by the soundness of the latest bubble. After all, you can't have much of a bubble if the regulators and the market's most trusted wise men don't believe in it. Yet you still have bubbles. The most important role for financial regulation is as a safeguard for when our collective judgment fails.
Photo credit: Brendan Smialowski -- Bloomberg News Photo .
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