Mr. Alan Greenspan, who headed the Federal Reserve, the U.S. central bank, for nearly twenty years, has recently committed an article in the Financial Times entitled “Frank-Dodd Fails to Meet test of our times.” (March, the 29th).
The Dodd-Frank Act is a several thousand page long jumble of 243 separate regulations, thought of as a financial overhaul. That it is not up to the task goes without saying. A couple of basic principles such as a prohibition of wagers on price fluctuations would have done a much better job and would have filled a mere five pages. If I say that Mr. Greenspan has “committed” a text on this subject, it is precisely because when criticizing the Dodd-Frank Act he doesn’t do it for any of the possible good reasons but on account of its very few merits.
Mr. Greenspan who ruled global finance from 1987 to 2006 puts forward the following argument: “if financial activity x is banned in the US, people who practice it, will go elsewhere.” Thirty years ago politicians stopped laughing at such ludicrous argument and most recently they have started taking it very seriously indeed.
Say, We, the People’s Representatives, vote a law prohibiting unsafe financial practices, or in current parlance: “practices inducing systemic risk”, i.e. increasing the probability that the whole economic system collapses. Now Mr. Greenspan comes along, saying: “Hey, there was money to be made there, and you’re suggesting in earnest someone else should be making it, instead of us?” and they then all exclaim: ” Oh Fiddledeesticks! Now that you mention it, it may not be such a great idea after all! ”
Aristotle had already noted that gold fever is a merchant’ professional disease – excusable as far as those of his kind are concerned – but against which ordinary citizens should be immunized. Yet, Greenspan’s irresponsible street corner grocer’s mentality has now become the thought of the day – in Brussels as well as in Washington.
The Dodd-Frank Act aims at making rating agencies accountable, which is, according to Mr. Greenspan, one of its further weaknesses because of its unexpected negative implications. In the past, rating agencies were content with issuing “opinions” like “AAA”, that is to say ” risk of default close to nil”, while the new law requires that they commit themselves a bit more: when they assign a credit risk score, they are now expected to “truly believe it”. Alas! Mr. Greenspan exclaims, see the negative consequences:
Shortly after the act’s passage in July 2010, Ford Motor Credit pulled its plans to issue a reported billion-dollar asset-backed security. It required a credit rating, which Ford could not obtain. One of the law’s provisions had made credit-rating organizations legally liable for their opinions about risks. To ensure the issuance of the ABS, the Securities and Exchange Commission in effect suspended the need for a credit rating.”
Time for a pause. Ford Motor Credit assembles a pool of auto loans up to one billion dollars in value. The raters, who by now engage their own responsibility, refuse to assess this security’s credit risk. This can only mean one thing: the pool is unadulterated junk. Following this, the SEC states that, well after all, rating is not that much of a necessity, and the security gets issued nevertheless.
What does this all mean? This means that as the Dodd-Frank Act withdrew crass unaccountability from the rating agencies, the regulator of financial markets has gleefully stepped in and volunteers to carry the torch of crass unaccountability, saying: “What’s all that fuss about credit risk rating? Here’s our seal of approval!
Is this foolish laxity due to the new act, as Mr. Greenspan seems to imply? In other words, what has led the SEC to condone Ford Motor Credit for issuing that junk – as this is indeed the rating agencies’ implicit opinion? I am not privy to it, but it is not difficult to imagine: some sort of blackmail at employment by the Ford Motor Company.
Blackmail at employment is an attempt at infusing the street corner grocer’s mentality among employees or even cajoling them into gold fever. “It would be a heartbreak to close down the landmine plant,” they say… “Some others will only be to happy to make them if we don’t! ” This is one of the sacrosanct rules that Mr. Greenspan puts forward.
For nearly twenty years at the helm of the Fed, Mr. Greenspan has been the most influential person in global finance. He ruled it or – more often – abstained from regulating it. He tells us now, succumbing to his street corner grocer mentality: “Don’t let others make money that we could make”- and this, regardless of how harmful the activity in question, regardless of the degree of “systemic risk” that is injected into the economy by allowing it.
A few days ago I mentioned a letter calling for the ban on wagers on price fluctuations jointly sent by a coalition of organizations to the Commodity Futures Trading Commission (CFTC), the U.S. regulator of commodity futures markets, and I drew the attention on the massive presence of religious orders among the signatories of this letter. The merchants have returned to the temple as soon as we stopped paying attention and they’re now clogging the corridors in New York, Chicago, London and Brussels. Because of them Moses hit the roof, Aristotle screamed daredevil, Jesus Christ, the Lamb of God, turned into a rioting demonstrator. As noted, the Union of Sisters of the Presentation of the Blessed Virgin Mary have taken over the frontline. We can’t allow them to be there on their own.
(translation by Bénédicte Kibler)