When I worked at Fortune I used to go down to Washington to talk to Alan Greenspan about once a year. I wasn’t really trying to report on what the Fed was up to, so the conversations could range all over the place. I remember one very clearly in which Greenspan stated his opinions on the utility of regulation.
His view was that there really wasn’t any. The rule of law was important–contracts had to be enforced. But beyond that, government intervention only messed up market incentives.
Today, Greenspan testified before Henry Waxman’s House Oversight Committee. Among the many things he said was:
As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue. This will offset in part market deficiencies stemming from the failures of counterparty surveillance.
There are additional regulatory changes that this breakdown of the central pillar of competitive markets requires in order to return to stability, particularly in the areas of fraud, settlement, and securitization. It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.
Despite the caveats and backpedaling at the end, this statement represents a truly major change of heart. Greenspan had been an adherent of what can probably best be described as the Chicago view of regulation, as propounded by Aaron Director, George Stigler, Ronald Coase and a whole lotta other people who did time in Hyde Park. Freely negotiated contracts were all that was needed to make markets work fairly and efficiently. Regulations governing business behavior just got in the way. Alan Greenspan doesn’t fully believe that any more. Do you?