The Born Ultimatum

by: Tim Iacono

Wow. The former Fed chairman’s hindquarters must still be smarting after the tongue-lashing that Brooksley Born delivered about an hour ago at the Financial Crisis Inquiry Commission hearing (see here for other details of the meeting).

Brooksley Born: In your recent book you describe yourself as an outlier in your libertarian opposition to most regulation. Your ideology has essentially been that financial markets, like the OTC derivatives market, are self regulatory and that government regulation is either unnecessary or harmful. You’ve also stated that, as a result of the financial crisis, you have now found a flaw in that ideology.

You served as chairman of the Federal Reserve Board for more than 18 years, retiring in 2006, and became, during that period, the most respected sage on financial markets in the world. I wonder if your belief in deregulation had any impact on the level of regulation over the financial markets in the United States and in the world.

You said that the mandates of the Federal Reserve were monetary policy, supervision and regulation of banks and bank holding companies, and systemic risk. You appropriately argued that the role of regulation is preventative. But, the Fed utterly failed to prevent the financial crisis.

The Fed and the banking regulators failed to prevent the housing bubble. They failed to prevent the predatory lending scandal. They failed to prevent our biggest banks and bank holding companies from engaging in activities that would bring them to the verge of collapse, without massive taxpayer bailouts. They failed to recognize the systemic risk posed by an unregulated over-the-counter derivatives market and they permitted the financial system and the economy to reach the brink of disaster.

You also failed to prevent many of our banks from consolidating and growing into gigantic institutions that are now today too big and/or too interconnected to fail. Didn’t the Federal Reserve system fail to meet its responsibilities – failed to carry its mandate?

Alan Greenspan: First of all, the flaw in the system that I acknowledged was an inability to fully understand the state and extent of potential risks that were as yet untested…

Recall that Born was the former head of the CFTC whose quest to regulate over-the-counter derivatives was thwarted by Alan Greenspan, former Treasury Secretary Robert Rubin, and current White House economic adviser Larry Summers.