Want to read a transript of Wall Street's regulators failing?
This transcript of Alan Greenspan trying to convince the Federal Reserve's Board of Governors to dismiss the obvious anomalies on the rent-to-price ratio graph (pictured) is a remarkable document. The SEC's case against Goldman Sachs might be more media-friendly, but this should be a similarly large bombshell for the people writing financial reform.
What you're reading is regulatory failure in transcript form. Presented with evidence that something is going awry in the economy, Greenspan and Co. nitpick, divert, speculate and finally just change the subject. They felt good about things, and so evidence to the contrary was ignored. And it's not because the people around that table were dumb or evil. It's because they were caught up in the times. If they hadn't been, we wouldn't be having this conversation.
But this is why you need to be very careful with the idea that regulation plus information is sufficient. We had regulators and they had information. And it proved totally insufficient. When I asked Sen. Mark Warner how the bill would have stopped the crisis, the first thing he brought up was the Office of Financial Research, which is there to distribute real-time information. Maybe the OFR would put the dots together and maybe it wouldn't, but there's a serious chance that even if it did, the top-line regulators would find reasons to ignore the conclusions of these nameless quants who don't understand the sophistication of the risk analysis being performed on Wall Street, or the anger that the president and the Congress and the Wall Street Journal editorial page will turn on any regulator dumb enough to try and interrupt the good times based on a graph and a theory.
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