Will We Ignore Brooksley Born Again?

Eleven years ago, U.S. economic leaders should have listened to Brooksley Born.

Then head of the Commodity Futures Trading Commission (CFTC), Born was concerned about new and unregulated futures markets. They were growing at tremendous rates, yet their risks were not fully understood. She was especially wary of the lack of transparency in trading over-the-counter private "derivatives," so she issued a call for comments about the need for regulation and oversight.

As Narda Zacchino and Robert Scheer point out in their piece about Born in the just-released Fall issue of Ms. magazine, instead of recognizing Born's foresight, "they shot the messenger." The old boys' club of U.S. economic advisors -- including former treasury secretary Robert Rubin, former Federal Reserve chair Alan Greenspan and the current director of the National Economic Council Lawrence Summers -- did everything they could to stop Born from asking more questions and to block Congress from taking action.

We all know where that head-in-the-sand approach got us: into a deep recession, triggered in large part by unregulated derivatives trading.

But it's do-over time: Will the U.S. Congress listen to the echoes of Born's voice when they tackle forthcoming legislation to better regulate the over-the-counter derivatives market?
So far, the news is frustrating. The bill that passed out of the House Finance and Agriculture Committees in October has loopholes big enough to drive billions of dollars through. "If people are paying attention they will see that there is still a house of cards and that these loopholes are going to codify that," Sen. Maria Cantwell (D-Wash.) told the Boston Globe. Yes, there will be more regulations, but, as the legislation now stands, large banks and financial institutions can still escape much of the needed oversight.

As Born told Ms., "I did feel to some extent as though I was the little boy saying, 'The emperor doesn't have any clothes.' I was absolutely mystified that both the industry and the other financial regulators did not even want to ask questions about an enormous financial market [about $600 trillion] that none of us had any insight into."

After the financial meltdown, much insight has been gained. And more will certainly be learned when the Financial Crisis Inquiry Commission, a 10-member group appointed by Congress which includes Born, delivers its report in December 2010. But the emperor that is the U.S. Congress is still displaying a lot of naked flesh. If it doesn't tighten regulations further when the bill comes to the floor of the House this month, and then on to the Senate, we risk a replay of the economic crisis.

"There was nothing inevitable about the current financial meltdown other than the stupidity, greed and arrogance that enabled it," wrote Zacchino and Scheer in Ms. "The price for not heeding Brooksley Born will be paid for generations to come."

So Congress, don't ignore the warning again.

For the complete Ms. article on Brooksley Born, "They Shot the Messenger," look for the Fall issue of Ms. on newsstands now, or have it delivered to your door by joining the Ms. community.

 

Comments

[blueken]

I think the problem lies at the top of our financial system. The supply side men (mostly) at the top are convinced that they are smarter than us, and deserve a greater share of the prosperity of this country. They believe that they create wealth out of thin air and no amount of contrary information seems to alter that perception. I do see some notable exceptions. Allen Greenspan has admitted he was wrong. Warren Buffet has serious doubts. Last but not least our own Arianna Huffington has come over from the dark side. The problem is that these supply side men and their delusions have the ears of the White House and Congress and continue to stear policy. Now how do we de-cupple our economy from the fantasy land of the "captians of the universe" with out causing a whole lot of damage. That's the rub. We let this tumor get way too big.

[lastpost]

“They Shot the Messenger,"

Here’s an idea:
Stop shooting the messengers, start shooting the messmakers.

[bestealth]

Warren / Born 2012

[cecebo]

I don't think that the environmentalists in this country will forget who made the decision to give the potato farmers water instead of the tens of thousands of salmon in the Klamath River resulting in the sudden death of 70,000 plus healthy salmon in 2002 from which the west coast salmon fishery will likely never recover. Are you listening Warren, Cheney, Norton, and Bush?

[bestealth]

Thank you

[ProgressiveVoice]

Why are they voting on reform measures before the FCIC releases its report?

[mcostello]

Repubs and Dems need to be shown that the real battle is citizen vs. corporation. As a citizen I can say: We are losing.

[DiogenesOfAlaska]

Since I am a male feminist in favor of derivatives regulation, it is probably unsurprising that my objections circle around the question of who exactly is the naked emperor/empress.

Nota bene: I have no doubts at all that he/she is naked. I'm taking that for granted. In fact: I know it.

But why is it congress? Why is it not the lobbyists? Or the bankers? Or the voters? Or the Rumpelstiltskins?

Well, let's see how far we can get with respect to that crucial task - of finding out precisely who it is that is stark naked:

If you'll allow, I will take a certain simplification in the first step of narrowing down: it must be those who know better (meaning, of course, those who know that being naked is kind of touchy).

Who would that be? The Nobel Laureates? The columnists? Those who were eternally brilliant at striking faustian bargains? The taxpayers? The ignorants? The Marxists? The catholics? The Jews? The mortgage lenders? The subprime citizens?

Oh boy!

Are we getting confused?

No!

It is those who don't know that unless you can't price an asset, you can't trade it. Well, to be perfectly honest, it is those who don't know that this applies to derivative contracts as well.

[DiogenesOfAlaska]

that ole grammar thing:

unless you CAN price an asset, you can't trade it.

[HenryDavid]

"The price for not heeding Brooksley Born will be paid for generations to come."

Absolutely true. Now that's been further verified by Greenspan admitting he was wrong in his programs. The damage he did was truly incalculable. The U.S. public should be told the story of Brooksley Born vs. the Greenspan crew again and again and again.

It's not enough to disprove and show our displeasure with Geitner, Summers, and Greenspan. We've done a lot of that and gotten nowhere.

We need to elevate and make very public the leaders who are standing up for the right thing, people who are representing the people's interests.

Brooksley Born, Elizabeth Warren, Marcy Kaptur, Maria Cantwell, et al. The country now has some role models who should be elevated in the media. This could bring other leaders to the forefront who truly want to do right.

[mcostello]

bravo!

[jackstpaul]

It goes back more than 11 years as far the issue breaking into national new, which is not to deny Born her due. The derivatives issue came to the fore in a much smaller fashion in 1994, and there was talk about setting up an exchange and regulating them then. Bill Clinton decided not to create an exchange or to regulate them. 14 years later.....­.....

I'm a liberal and voted for Clinton, but I worked in trust and investments at the time in control functions and encountered bookkeeping problems with ones we had for a client of ours, which led me to explore the bigger picture for us. We didn't act, in my opinion--and per my recommendation--as we should have, but that was small potatoes accounting and recordkeeping issues, not financial risk per se. It was a “balance sheet” reporting issue.

I thought derivatives needed regulation. Clinton blew it. So did Congress, and Bush....bu­t what happened last year is very much indicative of a massive screw-up by Clinton, who of course was advised by most of the people mentioned in the article.

Had Born prevailed, last year wouldn't have happened.

[mcostello]

But Clinton would have been lambasted for taking the punch away from the party.
The American people will not be refused their toys.

[HamletsMill]

Amen. Fanned. I voted for him twice and even once personally met him and shook his hand. But he s c r e w e d up big time. And he will now pay in history big time. He wasn't up to it. Judgment Day came unawares while he had his mind on other things. He was not big enough in his own understanding to be able to stand up to his economic advisers. President Obama is now in the same vortex only in real time. Empowering Geithner and Summers and not Volcker may be absolutely fatal.

Are we in April 1930 or July 1931? The recovery so far is just like October 1929 to April 1930 and then the other shoe dropped...

If we don't listen to Brooksley Boorne now, I fear the other shoe will drop with $200 trillion in unregulated OTC derivatives now out there in play by the Big 5 TARP Banks with the money that was supposed to go to for loans to Main Street...

On The Road To Economic Recovery Or On The Eve Of A Great Depression
http://mcauleysworld.wordpress.com/

[sonofsamphm1c]

Before you make this claim, you have to prove derivatives caused the credit crisis, and it is my understanding that nobody can get an economic model to blow up unless you introduce a massive subprime perturbation. When Born made her ignored prediction, subprime was small and managed.

President Bush unleashed the subprime monster, and the blame for the credit crisis is squarely on him, not Clinton. If Bush had a brain, or if Greenspan had elected to use the regulatory authority he already had over subprime, it's highly unlikely the credit crisis of 2008 would have happened, and Born would be a forgotten doomsayer.

Also, nobody is saying what reforms and regulations Born was specifically recommending. Geithner reformed the CDS while at the NYFed. Would his reforms have been sufficient for her? I think they would have been, and the credit crisis happened in spite of his CDS reform - which came way too late. It doesn't sound like she was asking for derivatives to be placed into the maximum security prison that progressives are envisioning.

[TJCole]

No they won't listen, they haven't learned a thing from this disaster they helped bring on....

America is one big rigged Casino...r­un by degenerate gamblers..­.

We're a government of the bankers, by the bankers, and for the bankers, not the people..no­t any more...if ever..

[sonofsamphm1c]

She predicted a financial crisis due to unregulated OTC derivatives. The scientific question that has not yet been answered is whether or not the credit crisis was caused by unregulated OTC derivatives.

In my opinion it was not caused by unregulated OTC derivatives. That does not mean they should not be better regulated. They should be. The Obama reforms for these is quite sufficient.

[mcostello]

WTH!

[sonofsamphm1c]

You think Brooksley Born will agree with you. I think she will agree with me.