Smart Women during the Financial Crisis
In 1997, Brooksley Born, now retired, directed a small federal office, the Commodity Futures Trading Commission, the federal agency which oversees the futures and commodity options markets. However, she was blocked from overseeing off-exchange markets for derivatives.(Derivatives are so-named because they derive their value from something else, such as currency or bond rates.)
She wanted to release a “concept paper” — essentially a set of questions — that explored whether there should be regulation of over-the-counter derivatives. President Clinton’s economic advisors were furious with her.
CFTC regulation was strenuously opposed by Federal Reserve chairman Alan Greenspan, Treasury Secretaries Robert Rubin and Lawrence Summers.
Simon Johnson and James Kwak in their new book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, stated: ” Larry Summers, Deputy Treasury Secretary for President Clinton called her and said: ‘I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.’” Unintimated, Born released a concept paper the following year much to the chargin of Clinton’s economic team.
A year later,following the suggestion of Clinton’s economic team, Congress enacted the Commodity Futures Modernization Act, which effectively gutted the ability of the CFTC to regulate OTC derivatives. With no other agency picking up the slack, the market grew, unchecked.
Years later she was proven right. The failure to regulate derivatives helped bring on the greatest recession since the Great Depression. In 2009, she was awarded the John F. Kennedy Profiles in Courage Award in recognition of the “political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis”.
Although Democrats try to trace the causes of the financial crisis back to the Bush administration, clearly, President Bush and Clinton both contributed to the current financial crisis as did Congress. The next time you see a Congressional hearing and the Congressmen and women are chastising the bankers, remember the legislation that Congress passed.