Last year Congress made Federal Reserve Board chair Alan Greenspan a virtual regulatory czar over financial services corporations. Considering the waves of adulation that have been sweeping over Greenspan, the anointment was not a surprise.
It would be reasonable to assume that before placing this important regulatory power under the Federal Reserve, Congress undertook a careful review of Greenspan's regulatory philosophy and record. You can toss that assumption in the nearest trash can.
Congress knows little and cares less about how Greenspan views the government's role in protecting the public interest and the public purse. The same is true for the three presidents -- Ronald Reagan, George Bush, and William Clinton -- who have appointed and reappointed Greenspan to four terms as chair of the Federal Reserve.
A causal observer of Senate confirmation hearings would be led to believe that financial regulation has nothing to do with the job of Federal Reserve chair. The issue never comes up. It is the rarest of occurrences when a congressional oversight hearing places a Federal Reserve official in the dock over financial regulatory shortcomings.
Yet Congress, with only half-hearted opposition from the Clinton administration's Treasury Department, handed Greenspan and the Federal Reserve the regulatory plums when it authorized the merger of banks, securities firms, and insurance companies under common ownership in giant conglomerates. The safety and soundness of the nation's financial system will rest heavily on how vigorously the Federal Reserve carries out its responsibility.
For longtime watchers of Greenspan the move was incongruous, if not outright risky. As a disciple of Ayn Rand, later as an economic guru for the Republican Party, and still later as a lobbyist for financial corporations, Greenspan has disagreed with regulation as a tool to protect consumers and the well-being of a free enterprise economy. Greenspan has argued that the self-interest of the corporations – the desire of corporations to protect their reputation – was all that was necessary for consumer protection.
In an article published in 1963 as part of Ayn Rand's book Capitalism: The Unknown Ideal, Greenspan declared that protection of the consumer against "dishonest and unscrupulous business was the cardinal ingredient of welfare statism."
"Regulation which is based on force and fear undermines the moral base of business dealings," he wrote. "Protection of the consumer by regulation ... is illusory."
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Some may well argue that these diatribes against regulation were part of a passing phase in Greenspan's career. Perhaps, but this philosophy was alive and well when Greenspan, as a consultant-lobbyist, badgered federal regulators. In one case, Greenspan intervened directly with the principal regulator of Charles Keating's Lincoln Savings in an attempt to gain special exemptions from regulations for the institution. Risky investments ultimately brought Lincoln Savings down, sent Keating to jail, and cost the taxpayers $2.5 billion. Greenspan became chair of the Federal Reserve.
Greenspan's antiregulation philosophy continues to crop up at the Federal Reserve. Not only has the General Accounting Office raised questions about the efficacy of the Federal Reserve's regulation of bank holding companies, but Greenspan has erected roadblocks to the collection of data important to consumer protection and fair lending as well.
In 1996 Greenspan was urged to help in the enforcement of fair lending laws by collecting data on the race and gender of applicants for small business and consumer loans. Despite pleas from the Office of the Comptroller of the Currency and the Civil Rights Division of the Justice Department, Greenspan and his fellow governors blocked the proposal.
This year Greenspan decided to end the collection of nationwide data on bank fees. The survey, which was authorized as part of the financial reforms adopted in 1989, has proven an excellent tool that consumer groups have used to highlight and battle the excessive fees that banks impose on consumers.
Similarly, the Federal Reserve is dropping its "Functional Cost Analysis" study, which has provided important data on how much it costs banks to provide services. This has been a great tool for measuring the validity of bank charges. Credit unions, particularly, have made good use of this data to dramatize fee and interest rate gouging by banks.
But if we believe the words of Greenspan during his Ayn Rand period, he probably doesn't see any need for such data, much less regulation.
And if anyone complains about the loss of such consumer and fair-lending information, Greenspan could send them this excerpt from his writings with Ayn Rand: "Government regulation is not an alternative means of protecting the consumer. It does not build quality into goods, or accuracy into information. Its sole contribution is to substitute force and fear for incentive as the 'protector' of the consumer. The euphemisms of government press releases to the contrary notwithstanding, the basis of regulation is armed force. At the bottom of the endless pile of paper work which characterizes all regulation lies a gun."
And this is the Alan Greenspan who Congress believes should protect the public interest in the regulation of the new financial conglomerates?