So much for learning from history

The New York Times just re-ran this oped published in 1990 in the wake of the Drexel Burnham collapse and the Savings and Loan fiasco. Some highlights:

“The credit system suffered further from the Government’s willingness to allow deregulation to proceed in the absence of adequate new safeguards, improved official financial supervision and stricter rules of financial conduct. Instead, from Main Street to Wall Street, excesses multiplied through the employment of novel financial techniques and liberalized credit standards that were unthinkable even two decades ago.

Hardly anyone in authority stopped to question the implications for the financial system. The facile rhetoric was that the ”marketplace” would discipline the wrongdoers in our financial system.

But relying on the market to discipline financial institutions is generally unacceptable. It is too blunt a weapon for financial institutions, which are thinly capitalized and closely linked through myriads of transactions with other institutions.”

“For many firms in the securities industry, the franchise that they once had will not be recaptured. Wall Street’s special role as adviser and investment banker to business and to other financial institutions is waning rapidly. The foundations of this role were based on trust. That trust has been shattered by conflicts of interest that were created when many securities firms rushed to participate in hostile takeovers and direct acquisitions of nonfinancial businesses.”

Well, so much for that. I recently heard Robert Merton, the Harvard economics professor and Nobel Prize winner, talking about the crash. He made the point that in a free market system, innovation will ALWAYS outstrip regulation. It’s pointless saying regulation failed. It will always be outdated in a system which rewards innovation. So regulation is not the problem. What failed was the morality and sense of responsibility among those who created this mess. They simply did not give a damn about the consequences of their actions for anyone but themselves.


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