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Editorial: The lure of profits (Rutland Herald)

Alan Greenspan is getting much of the blame for his failure to police the financial markets during his tenure as chairman of the Federal Reserve. But Democrats, too, succumbed to the self-justifying power of vast profits and thought they needed to get out of the way of the wizards of Wall Street.

A revealing account in the Oct. 9 New York Times showed how former Treasury Secretary Robert Rubin and Deputy Secretary Lawrence Summers teamed up with Greenspan to browbeat a dissenting voice into silencing her misgivings about the exotic financial instruments that 10 years later have undermined the economy. They warned Brooksley Born, chairwoman of the Commodity Futures Trading Commission, that for her even to voice her concerns about the danger of derivatives would shake the confidence of the market and hurt profits.

Rubin knew something about profits. Before he became treasury secretary, he was CEO of Goldman Sachs. Apparently, he, along with Summers and Greenspan, believed it would be dangerous to question the prevailing notion that Wall Street had devised new ways to contain risk. It is not easy to raise a cautionary voice against practices that are reaping billions in profits.

Greenspan has not issued a mea culpa regarding his ideas, but the New York Times article contained a revealing justification by Greenspan for his line of thinking. He said the problem was not the shaky mortgage-backed securities that now are considered toxic. He said the problem was that people on Wall Street had gotten greedy. He said Wall Street had not suffered from a lack of regulation but from a lack of integrity.

But that is why we have regulation. Not everyone is a crook, but the lure of profits has a way of clouding the thinking even of smart people like Greenspan, Rubin and Summers. Their unwillingness to heed the warnings of Brooksley Born shows how people make mistakes. Warren Buffet and George Soros were among the prominent financiers who were also sounding alarms, but Greenspan and the others appear to have succumbed to the sort of group-think that is easily encouraged by the dazzling effect of big profits.

The Securities and Exchange Commission was created by Franklin Roosevelt to oversee the stock market, but in recent years, it has been starved of staff and funds, undermining its enforcement powers. Further, the big investment banks and the derivatives they created were outside the jurisdiction of the SEC, and they were able to put themselves at high risk by piling up huge debt. The chairman of the Securities and Exchange Commission, acknowledged several weeks ago that the commission's program of "voluntary" supervision had not worked, and he abolished it. A new era of regulation is coming. We have learned that we cannot rely on the voluntary compliance or the clear thinking of Wall Street. When everyone is subject to the same rules and the rules are enforced fairly, then the market can get on with its business of financing the American economy. The wizards of Wall Street, it turns out, are only human, which means they sometimes lack integrity, they often lack clear vision, and they do better when they are not allowed to get away with robbery.