Wednesday, October 21, 2009


I just finished watching Frontline: The Warning, which I highly recommend to anyone interested in financial regulation. The basic storyline should now be familiar to all: in good times the lessons of past financial crises fade quickly; those with economic power co-opt political leaders; regulations are rolled back and new activities are left to market forces; isolated voices may sound alarms but they are ignored or silenced; a new crisis emerges that teaches once again that laissez-faire is an economic dead end. The lesson typically costs trillions. Here the hero is Brooksley Born, the brilliant head of the CFTC, and the antagonists are Alan Greenspan, Lawrence Summers, Robert Rubin and Timothy Geithner. The issue is the regulation of derivatives, which Born pushed hard for and which ultimately led to her resignation.

The interview with Joseph Stiglitz is a classic. Arthur Levitt's regret at failing to support the effort for regulation is rather poignant. Greenspan's famous admission that his laissez-faire views were "flawed," is also a classic moment.

But perhaps the most important part of the documentary is when it traces the propagation of the deregulation mania from Reagan to Clinton to Bush II to the present day Obama administration. It seems like changes in administrations are meaningless when it comes to the power of entrenched elites.

Another disturbing message is that the time for reform is fading. As Paul Krugman recently recognized, Stiglitz too worries that the political energy towards regulatory reform has dissipated. Joe Grant's excellent post on this reality echoes this fact.

Brooksley Born's final statement is downright chilling. She warns that the failure to address gaps in our financial regulatory infrastructure will lead to crisis after crisis until we get regulation right.

I am today more skeptical than ever that future financial crises can be averted. First, the Obama reform proposals were weak at inception. Second, the banks are pulling out all the stops to kill even these weak proposals. Finally, time is certainly on the side of the banks. Since it is now over a year after the collapse of Lehman and the multi-trillion dollar bailouts, the probability of real reform is now receding on a daily basis.

Fasten your seat belts! "There will be significant financial downturns and disasters attributed to this regulatory gap."

PS: dre cummings wrote a prophetic paper on all this available for free download here.


  1. o.k., i am depressed.

    is free market capitalism dead? is there no hope for moderate regulatory oversight and strong public oversight through the right to sue?

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  3. No, I believe the best of capitalism is still ahead--in the US or otherwise. Any nation that gets capitalism right will enjoy explosive growth. My forthcoming book, Subprime Capitalism expands on this idea, but it comes down to this: Capitalism needs durable legal frameworks to protect itself from growth-retarding elites; think of it as the need to use law to fragment economic power just as the US Constitution successfully fragmented political power. We need an economic constitution.

  4. Professor Ramirez,

    How are you doing? I hope all is well. I saw this documentary recently as well. It was powerful to say the least. I think it is a required viewing for those interested in understanding some of the causes of the capital markets crisis. Thank you for bringing this to everyone's attention. Thanks for recognizing my post as well in your piece. Take care.