Henry Waxman's Congressional Committee questions Alan Greenspan. Greenspan meets greed, shows in one answer why "trusting the markets" is epic fail.
Waxman: So where do you think you made a mistake then?
Greenspan: I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such as they were best capable of protecting their own shareholders.
Last week, Republican presidential candidate John McCain called for a commission to “find out what went wrong” on Wall Street. It was an excellent suggestion: Public inquiries into Wall Street practices served the country well in the 1930s.
And Mr. McCain has a special advantage to bring to any such investigation — many of the relevant witnesses are friends or colleagues of his. In fact, he can probably get to the bottom of the whole mess just by cross-examining the people riding on his campaign bus. So the candidate should take a deep breath, remind himself that the country comes first, pull the Straight Talk Express over at a rest stop, whistle up his media pals, and begin.
The plan, which is still being hammered out with Congress, raises a number of red flags. First and foremost, unlike the process then, there’s no accompanying re-regulation of the financial services industry.
"We educated ourselves enough — we were able to build a competent structure,” says Donald Riegle, who chaired the Senate’s Banking Committee at the time. "We built a legislative package that worked quite well. FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) included creation of a regulator as well as the RTC.”
Though history shows the S&L crisis was resolved successfully, there was considerable skepticism about the FIRREA law, the new regulator it created, the Office of Thrift Supervision, and the bailout entity, the Resolution Trust Corp., at the time of their creation.
It also wound up costing less than many expected.
In the current rescue plan, the absence of regulatory reform is no small matter, given the size of the problem and the complexity of investment instruments today.
