The old saying, "Power tends to corrupt, and absolute power corrupts absolutely," rings true once more as we see ever-more-clearly what Goldman Sachs has been up to recently, whether it be the Greece mess or their center-stage presence in the US financial implosion, with the latest chapter being Friday's SEC charge of fraud. Who among us doubts that Goldman Sachs is too powerful.
But the old saying also rings true as we ponder why it was that the US Congress in the run-up to our current financial mess, with the blessings of the Clinton Administration, allowed firms to bet on impending tragedies of others without adequately weighing the consequences that such behaviors might have on financial markets. Here is what Lynn Stout had to say Friday in the NY Times "Room for Debate Blog" about the the US Congress and their lack of foresight in marking up The Commodities Futures Modernization Act of 2000:
In one dramatic move, [the Commodities Futures Modernization Act] eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk.
This traditional derivatives rule against purely speculative derivatives trading has a parallel in insurance law, because insurance, like derivatives trading, is really just a form of betting. A homeowner’s fire insurance policy, for example, is a bet with an insurance company that your house will burn down.
Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading ….By eliminating this centuries-old rule in the name of “modernization,” Congress created enormous problems of moral hazard in the off-exchange derivatives market. Imagine, for example, if we allow the unscrupulous to buy fire insurance on other people’s houses; the incidence of arson would rise dramatically.
The US Congress may not be too powerful, or maybe it is, but all we have to do is to ponder their approval ratings to wonder whether we Americans are being well-served by our Congress. On the other hand there were very few who were ready to "take to streets" to protest the Commodities Futures Modernization Act when it passed in 2000. Too bad Brooksley Born didn't fare better when she tried to challenge the likes of Alan Greenspan, Larry Summers, and Robert Rubin back in 1998.
Oh well. At least Born is now a part of the Financial Crisis Inquiry Commission and we all get to watch the ongoing show between now and Memorial Day (end of May) as the US Congress gets down to the business of righting the wrong that it gave us with financial deregulation and the Commodities Futures Modernization Act.
Comments