What Did Robert Rubin Think About Derivatives?

By James Kwak

First Bill Clinton said he got bad advice from Robert Rubin on derivatives. Then a Clinton adviser issued a statement essentially taking it back and blaming Alan Greenspan. (Jennifer Taub discussed some of the substantive issues on this blog.) Dan Froomkin asked Rubin, who said, “I thought we should regulate derivatives; I thought so when I was at Goldman Sachs and I thought so afterwards.” But Froomkin points out that Rubin was part of the team that suppressed Brooksley Born’s attempt to regulate derivatives back in 1998.

Brad DeLong defends Rubin, although it seems like a somewhat lukewarm defense. DeLong’s point #3 is: “Brooksley Born and her organization are the wrong people to regulate derivatives.” (That’s a statement of Rubin”s thinking at the time.)  Norman Carleton, a Treasury official at the time, also defends Rubin with two posts on his blog that spell out DeLong’s point #3. In the first post, he says that Rubin favored regulation but was concerned with giving the CFTC jurisdiction over the OTC derivatives market. In the second, he explains the issue (legal certainty of existing contracts, something I don’t really want to get into here, so go read the argument there) and concludes with this logically plausible but somewhat bizarre argument:

“Rubin had proposed to Born that, instead of the CFTC asking questions about the need for regulation of the OTC derivatives market, the President’s Working Group on Financial Markets issue the questions.  Born point blank refused this suggestion, thus pushing Rubin into Greenspan’s camp, much to the relief of ISDA and other Wall Street groups lobbying on this issue.  They knew they had a problem with Rubin.

“Brooksley Born was so sure she was right in her legal position that she could not compromise in face of the practical and political realities.  While, not to make too fine a point about it, she has been proven right and Greenspan wrong about the dangers of the OTC derivatives market, Greenspan was the better politician.  History might have been different if Born had agreed to Rubin’s suggestion.”

I say “bizarre” because Carleton’s implication, not to make too fine a point about it, is that the failure to regulate OTC derivatives is Born’s fault (the title of the post is “The Importance of Political Competence”), because if she had agreed with Rubin’s suggestion, then Greenspan would have been in the minority and derivatives would have been regulated. The picture you get in your mind is Greenspan and Born on the two sides and Rubin in the middle trying to broker a compromise with Born. (Although I wonder why Rubin, one of the most powerful figures in the administration, felt like he had to side with Greenspan simply because Born wouldn’t agree with him.)

So I think the fact of the matter is that we don’t know what Rubin thought about derivatives regulation in the mid-1990s, because somehow he managed to avoid making public statements about it at the time, or at least public statements that anyone can find using Google. (As opposed to Greenspan, all of whose speeches are nicely archived at federalreserve.gov.) It is true that the President’s Working Group report on the topic didn’t come out until 1999, and the Commodity Futures Modernization Act wasn’t passed until 2000, both after Rubin had left the government.

Now, Carleton was there at the time, and he is backing Rubin’s claim that he favored derivatives regulation. So maybe he did. But that still leaves Froomkin’s key issue unaddressed: “Precisely what Rubin told Clinton about the overall merits of regulating derivatives remains a mystery, and there is no evidence that he ever actively supported their regulation when it mattered” (emphasis added). If Rubin did favor regulating OTC derivatives, why didn’t he do anything about it? That, to me, is the real question, not what Rubin may have thought in the privacy of his own mind (or the privacy of the Oval Office).

The only answer to this to emerge in this “debate” is DeLong’s point #5: “The Federal Reserve has adequate powers to stem financial crisis and keep it from becoming a threat to the economy, and is also not worried about derivatives.” (Again, that’s a statement of Rubin’s beliefs at the time.) Maybe Rubin’s position was that derivatives should be regulated, but that the Federal Reserve was already regulating them sufficiently. It is plausible that one might have held such a belief, although it has been clearly proven wrong in the interim.

51 thoughts on “What Did Robert Rubin Think About Derivatives?

  1. You’re leaving out perhaps the most important player of all — Phil Gramm. Rubin couldn’t “do” anything about regulating derivatives without somehow forcing Gramm into a box. A very difficult, if not impossible, task. Republicans basically took marching orders from Gramm on financial sector matters — especially given Greenspan’s support for the hands-off-derivatives position.

    So political competence is very much at the heart of the matter. And Brooksley was a raging political incompetent who looked like she was engaged in a turf grab and was screaming the sky is falling in order to get her way. She got the back up of every potential ally, even people who essentially agreed with her, and handed easy victories to her enemies.

    Even if Rubin had come out for derivatives regulation, I’m certain that all Rubin and the Clinton admin would be able to say today is “we tried”. The bulk of the derivatives activity at that point was in the relatively safe and understandable interest and FX swaps; to extend regulation into financial derivatives required assuming that there would be an explosion of dodgy yet-to-be-invented assets that no one properly understood. Now, LTCM should have been a wake-up call of the dangers of leverage and uncorrelated risks that were actually correlated, but it just served to make Gramm and his friends that much more adamant that derivatives should remain hands-off because they were “essential risk management tools” for the new glorious financial universe we were moving into.

    Rubin could have tried to push derivatives regulation – and he did propose a way of getting it on the agenda which Born rejected – but I am convinced that even if it had been part of the President’s Working Group proposals, it wasn’t going to happen. Between Gramm and the Ag Committees, the Hill was enemy territory. To regulate the things would have required a full court press by the White House — about something that hadn’t happened yet (the CDS market was in its infancy), just a risk it might, and was (and still is) too complex to message simply. The only reason we’re getting action now, is that everybody can see that derivatives blew up even if they don’t understand why.

    I fault Rubin big-time in the 2000s for overseeing an out-of-control Citibank and for not making the sort of fuss during the Bush Admin about the obvious lack of any sort of adequate regulatory oversight.

    But I’m a bit tired of hearing about Brooksley Born, the martyr of Bob Rubin’s ideology or cowardice or something. She may have been right, but Bob Rubin didn’t kill her. She committed suicide and didn’t have anything to show us for her self-sacrifice.

  2. The operative phrase in Bill Clinton’s mea culpa is “caught trying.”

    As in, “Now, I think if I had tried to regulate them (OTC derivatives)because the Republicans were the majority in the Congress, they would have stopped it. But I wish I should have been caught trying. I mean, that was a mistake I made.”

    Speaks volumes.

  3. “Rubin favored regulation but was concerned with giving the CFTC jurisdiction over the OTC derivatives market”

    Say what!? There was never any issue of “giving” the CFTC jurisdiction. This jurisdiction was granted by the Commodities Exchange Act decades earlier. The CEA was amended in 1992 to allow the CFTC to exempt swaps from regulation — which the CFTC did in 1993. Rubin et al. were objecting to the powers unequivocally granted by Congress to the CFTC. They didn’t have a legal leg to stand on.

  4. “Rubin had proposed to Born that, instead of the CFTC asking questions about the need for regulation of the OTC derivatives market, the President’s Working Group on Financial Markets issue the questions.”

    When did we start determining who asks the questions in a free society? And, more importantly, one has to ask oneself who were the players in the President’s Working Group on Finacial Matters and: A. how much influence did svengali Bob have over the “Group?”; B. why wasn’t the “Group” asking its own questions?

  5. Please note the CEA regulates contracts for future delivery (obviously swaps fall under this heading), not futures contracts.

  6. This is complete bs.
    We need as regulators people who understand the potential for new products to be harmful, not people who have to wait until the new products blow up in order to make up their feeble minds.

  7. As I mentioned on DeLong’s Blog, (5) became literally incredible after the LTCM crisis in Sept. 1998.

    – OTC derivatives were key to LTCM’s leverage
    – the Fed was clearly worried about the systemic risk that LTCM posed
    – it was clear that the Fed lacked the legal tools to dissolve a hedge fund.

    The recommendations issued in the wake of LTCM are the template for what Geithner originally called for a year ago, esp. when it comes to OTC derivatives.

  8. Criticizing the regulator for not bending to the political powers seems a bit thick given recent experiences.

    The process of regulatory capture requires this process of compromise for the regulated to, inch by inch, emasculate regulation

  9. How could you Mr. Rubin? Quoted from the great T.S. Elliot (1888-1965) – “Macavity,Macavity,there’s no one like Macavity(Sandy Weill), There never was a Cat of such deceitfulness and suavity. – He always has an alibi,and one or two to spare: At whatever time the deed took place-Macavity (Weill)WASN’T THERE! – and then they say that all the Cats whose wicked deeds are widely known {I might mention Mungojerrie (R.Rubin),I might mention Griddlebone (Henry”Hank”Paulson)} – Are nothing more than agents for the Cat who all the time – Just controls their operations: the Napoleon of Crime! Note: Memoirs of Sherlock Holmes(1894) “The Final Problem” Quote:Sir Arthur Conan Doyle(1859-1930) “Ex-Professor Moriarty of mathematical celebrity…is the Napoleon of crime,Watson. Fini!….Thanks, and please “Keep up the Good Diggings for America’s Sake”

  10. Overall, I like and respect Brad DeLong, but I think his relationship, current/former(???) friendship with Lawrence Summers strongly colors his views on this issue.

  11. And if you want to think of it as a historical curiosity, look at the dates, and see how the SEC aligns itself with Basel II before the US does so.

  12. There is little doubt in my mind that this is correct.

    Brad has shown a tendency to serve as an apologist for certain people again and again, to the limit of his credibility.

    I am not sure it is friendship though, that calls forth such dogged loyalty to the powerful.

  13. “Progress is a nice word. But change is its motivator. And change has its enemies.” Robert F. Kennedy

    After reading this piece and the suggestion by some that the Working Group on financial Markets otherwise known as the PPT would indeed be asking the fox to watch the hen house. Brooksley Born was and still is eminently qualified to understand these transactions and the CFTC or anoy other body that she was a part of or headed would have worked. But the old boy’s club would have none of it and Greenspan saw to that.

    The only answer to this to emerge in this “debate” is DeLong’s point #5: “The Federal Reserve has adequate powers to stem financial crisis and keep it from becoming a threat to the economy, and is also not worried about derivatives.”…..I think professor Black would take issue with that statement given his recent testimony. Either the great minds at the Fed are covering up for some other entity in our shadow government, or they are simply incompetents. As posted earlier today, the rats are indeed looking to jump ship.

  14. Yeah, Simon, what is up with this line on Brooksley and Robert. As far as I am concerned the book is closed on this matter. Greenspan, Rubin, et al, shoved her aside like so much dirty laundry. They didn’t want her raining on their parade, and, although the CFTC was not the appropriate regulator (she probably even knew that, although they were regulating all of the future commodities contracts derivatives), they needed her ideas gone, so she was summarily dismissed from their deregulation party without even a goodbye (she quit shortly after she was squelched, in disgust.

    And, now we have a chance, going forward to actually make the markets open, transparent, etc. Today, during a fishing expedition trying to locate when the President’s Cooper presentation was to be carried, and I ran across and amazingly telling bit of C-Span that occurred this morning. It is this mornings Today in Washington call-in show starring the co-chairman of the Senate Agriculture Committee, which is tasked with developing the portion of the Senate bill to be used to govern derivatives, Saxby Chambliss of Georgia. Having watched him, I am so ashamed to admit that he represents my fellow Georgia constituants. Of course, the majority of the show was spent discussing the pending legislation. I was truly flabberghasted to find that he really hasn’t a clue relating to the structuring of the various sorts of financial derivatives, and seems to barely grasp what commodity futures derivatives are about. This is easy to tell if you listen. If he truly knew, then he would have been able to explain them better. He tries (bear in mind that he is an attorney, so not actually quite as stupid as he appears), but I think that he hasn’t actually learned enough to be conversant on the very topic that his committee is attempting to provide meaningful legislation. I think that he is relying on lobbyists for their information, and we all know how their “lessons” on issues of interest are fraught with holes (I know, because I used to be a lobbyist).

    It is discouraging to think that anyone who is involved in the minutia of a complex legislative process has almost no command of its subject matter. He should be challenged to a debate on the topic so that his ignorance can be paraded before the public and he can be shown to be the charletan that he is. I hope that Blanche Lincoln is better informed, or we are going to get legislation on reading from blind people.

  15. @Jake Chase,

    You asked: “Now you understand financial innovation. What do you think?” My response here Did I get it right? Put another way, if I am wrong in my attempt to grasp the details please let me know.

  16. So I think the fact of the matter is that we don’t know what Rubin thought about derivatives regulation in the mid-1990s, because somehow he managed to avoid making public statements about it at the time, or at least public statements that anyone can find using Google.

    Um, yes, we do know. We know from his actions that he opposed any regulation whatsoever.

    It’s hard to believe that even now there’s still those who think there’s any meaningful measure of the intent of powerful actors other than their actions.

    (If Rubin really felt differently he’d go out today and publicly call for e.g. a ban on speculative derivatives, or something with similar rigor. That would be an action. The rest of this is moonshine.)

    And why would anyone want to parse the retrospective spin and lies of a gaggle of hacks? That’s both pointless and tedious.

    There too it’s very simple: Hack = Liar.


  17. I said something like this in the comments to Delong’s post.

    A major reason Greenspan, Summers, Rubin et al quashed Brooksly Born was that at that time the OTC derivatives were less than $1T – 1/10th GDP, so, not a big problem in the politico-economic sphere/grand scheme of things. But, in six years they were $60T – 5X GDP. Somewhere in that continuum there was a point when -someone- should have said “Wait. Look at this”. If Born had stayed at the CFTC maybe it would have been she. But, when the Bushies came in, she would have been gone anyway. Anyone who brought it up – prob. someone did – would have been told to get a grip, that thing you see is merely our Dear Invisible Hand doing it’s thing.

  18. re: “If Rubin did favor regulating OTC derivatives, why didn’t he do anything about it? That, to me, is the real question, not what Rubin may have thought in the privacy of his own mind…”

    Amen. Silence is consent; by your actions you shall be known; etc.

  19. Although I wonder why Rubin, one of the most powerful figures in the administration, felt like he had to side with Greenspan simply because Born wouldn’t agree with him.

    Rubin was probably influenced by Greenspan, as the two had daily morning breakfast meetings while Rubin served at Treasury; his Deputy Secretary at Treasury Larry Summers also took the position that derivatives serve a useful purpose when markets are functioned efficiently.

    Rubin also began his career at Goldman Sachs in risk arbitrage.

    And, of course all of this discussion over regulating derivatives occurred during a boom cycle…no one anticipates a crash until an undertow pulls everything under.

    Yes, he should have recognized what Brooksley Born had warned.

    …is it just possible that he thought it was improbable that a sharp contraction in housing would ever happen? I think his memoir “In an Uncertain World” published in 2003 is testament that he was well aware of the risk, but sided with the consensus among the other members of Clinton’s Financial Markets Working Group.

    I thought both derivatives and leverage could pose problems.

    Derivatives serve a useful purpose by providing a means to manage risk more effectively and precisely, but the can create additional problems when the system is stressed.


    Larry thought I was overly concerned with the risks of derivatives. His argument was characteristic of many students of markets, who argue that derivatives serve an important purpose in allocating risk by letting each person take as much of whatever kind of risk he wants.

    I’d say he was outvoted (by none other than one of his underlings at Treasury) by consensus.

  20. Born wasn’t the only one raising and waving a red flag or taking the hit. Greenberger (energy oversight at the time of CFTC) during the time was also adamant as were other sober adults in the room. The GLBA and CFMA were time bombs now exploding a mere 11 years later. Failure much? I think regulatory arbitrage has proven itself to be more dangerous than any of these ‘masterful’ people would recognize. Prudence lost long ago in decision making for the masses, eh?

    The legislation represented a paradigm shift economically. Many people saw through it that weren’t policy wonks or economists. To politicize any subject renders it to near uselessness. Economics is a perfect example. Scientific subjects, once politicized, become anti-science as the entire process is spoiled and weighted to exclude objective analysis that might limit profits. Big Pharma is a perfect example.

    The idea that politicians and self-interested parties are so bright they can be experts in any subject matter is so arrogant and contemptuous that it boggles the mind. Serous people warned them who were experts and didn’t have an interest in enriching themselves. They were ignored so exit stage left. Greenspan was worshiped as an idol in the markets; the wise sage who knew all mystically despite evidence to the contrary.

    That Born wasn’t a calculating political beast isn’t the issue. We can’t all be political, we can’t all be economists, we can’t all be competent in every subject in our complex world to execute caveat emptor so we aren’t harmed.

    Those who are competent and focused in a field should be given heavier weight in making decisions than those who stand to gain politically or otherwise, this is called being rational…this is a key element missing in the culture/politics and finance today as short term profiteering in career making and in profits trumps everything else. Great, we’ve been trumped and trampled to death now.

  21. Please keep digging. this is excellent work. Rubin & gang of artful dodgers have all the responsibility of poor advise accompanied by their poor judgment. dropping the dime on gramm is just a weak dodge by rubin.

  22. Like Delong’s post, this is a bit absurd. Russ is right: powerful actors should be judged by their actions, and Rubin was a very powerful actor who repeatedly (in government and then at Citi) failed. Of course, the other side of the coin is that powerful actors can only in the rarest of circumstances be unconventional thinkers, because as soon as you start to think unconventionally, as Born did, everybody starts to find you “politically incompetent.” To think that Rubin had free will is kind of funny. His failures then, like his excuses now, conform precisely to the pressures of his situation.

  23. I think you have it exactly right. Add the fact that these deals only made sense to the participants because they are permitted to book profits on the basis of free hand models, and then extract the profits in bonuses for themselves. The models all assume that defaults on the underlying obligations (the mortages) will be uncorrelated. Does anyone in his right mind think that mortgage defaults occur independently of one another? Of course not. These Credit Default Swaps were a con, nothing else.

  24. It is too bad economists like DeLong are not required to dress up in clown suits complete with red nose. It is amazing that anyone continues to take these people seriously.

    Economics is fraudulent assumptions wrapped up in impenetrable mathematics. How exactly is this supposed to help?

  25. Errr, I think Saxby Chambliss has all the clue he needs.

    Go google Intercontinental Exchange, guess what city its headquartered in; I’ll give you three hints— Coca Cola, 1996 Olympics, Atlanta Braves.

    I can’t really fault a senator for sticking up for the interests of a constituent (I imagine Chambliss would be foursquare against a soft drink tax for the same reason) so long as everyone recognizes he has a dog in the fight.

  26. What a perfect package. Look at that lovely bow. Let the decannonization of Brooksley Born begin. After all, she is a woman, and a lawyer to boot. I knew it had to be her all along. Had to be.

  27. It bears repeating:

    Time’s Person(s) of the year for 2009 should have been:

    Brookley Born & Harry Markopolis.

    The time has come to give prescient and brilliant people, as well as brave whistle-blowers, the respect and protections due to them – as should be accorded in a civilized meritocracy.

    Why is it so difficult to elevate such deserving persons to the pedestals and positions now occupied by the sycophants of the status quo power brokers?

    We have Pro Publica as an independently funded investigative reporting entity. Why not have a similarly funded whistle-blower entity offering “real” protection for actual whistle-blowers?

    Organizations like the Center for Public Integrity do great work but have little influence or offer no protection for those people who can often stop calamities before they transpire. CREW is also limited since they offer little in the way of such protection.

    Is it any wonder that knowledgeable individuals feel impotent in the face of regulatory capture and political reprisals as evidenced by the story of Ms Born? Can you imagine the frustration and depression she must have felt when the entire weight of Clinton’s treasury department was tilted against her? Her’s was not a selfish position. She fought for the entire financial system, was vilified and then shown the exit. How humiliating for any person whose objectives were noble and sound.

    If civilized society harbours any hope to change the rule of the oligarchs then protections must be provided for those individuals of conscience who are in a position to expose wrongdoing on the part of the powerful.

    Otherwise, the “personal” cost/benefit analysis will dissuade such efforts and the realization of effective change will remain less likely.

  28. Rubin is a schmuck; as Treasury Secretary he failed to protect the interests of this country, either through ignorance or malice. Now he can’t take his share of the responsibility like a man.

    He is an example of someone who managed to get a reputation which got him into the inner circles of power on Wall Street and in Government. From what I can see, that reputation had little to do with any real understanding of our economic system.

    It was a destructive to de-regulate the financial system as it would be to deregulate the transportation system by: eliminating all traffic lights, traffic signs, lane markets, speed limits, traffic police, courts and prisons, eliminate driver education and merely toss the car keys to teenagers and wishe them luck on the unregulated “free market” of driving.

    Markets and intersections are merely homeostatic (distributed) short term decision making venues (as contrasted to hierarchical ones which establish the regulations and training). Both require education, ethics and regulation to work smoothly and efficiently. There is neither strategic thinking nor anything particularly magic about decisions made at intersections or in markets. Those who believe in “free markets” as some sort of magical instrument that makes optimal choices are blithering idiots. (Sorry Phil Graham, Robert Rubin, Alan Greenspan and Larry Summers, I mean you)

    I write about this in my blog.

  29. Re: @ Jese…….Think of it like this? An artist (author) starts out with a blank canvas…strokes (pens) the canvas with whitewash (ink) to mask the underlying natural (marginalizes the corners too an opaque lexicon…cutting-edges to biased footnotes) innocence of the mural (event) – thus the creativity begins with moments of genius(deception),and critique (amnesia). The painting (storyline)ebbs,and flows with fast,and furious splashes of hard primary (opinionated) colors minced (dipping once again into a watered down ink-well) gently ,but oh-so subtly. The master (artist/author) srategically parcels (ambiguity) the well placed soft pastel strokes too sooth the admirers (audience) eyes. The finnished (the best seller too its prejudiced flock) masterpiece de re’sistance de’jour. But,…unbeknowst too the unsophisticated (conscious) minds-eye,…”all artist canvas’s (authors/stories)can paint (print)the mural (book) of deceit,or with nobelness but only the unmolested pellucid canvas below knows only the truth?

  30. hey

    what did rubin ever do to address this issue ??

    forget 1997-1998
    what about 2003-2005??

    listen this is a disinformation campaign
    to cover a clinton admission of rubins role
    as wall street nuncio in the clinton white house

  31. Great comments on this blog post. It should be obvious by now that all the minds trying to think this through don’t amount to much in light of one simple fact: as we’ve poured on the computing power the nature of the game has changed.

    It has completely overwhelmed our understanding of these markets. Robert Rubin isn’t, as one commentator pointed out, smart enough to wrap his mind around this. He only thought he was, as did Greenspan, and Summers, and the other “guys” who didn’t want anyone screwing with this toy.

    This is going to happen again and again. It’s not just a fluke that we’re starting to get faster and faster cycles of destruction. What was needed, and what still is needed, is a database to instantly track what’s in each of these derived investments. Make it public, let a million eyeballs gaze at the contents of each. The trash will shine on through so quickly that it will end the sort of corruption that pervaded this whole enterprise. Make this market transparent. If it can’t be done, or the players won’t do that, shut it down. There is no other answer.

    In the parlance of mathematics, these are iterated discrete non-linear dynamical systems. In short, they’re chaotic. Transitions to other system states, where the whole thing can crash and burn, is built in. Statistical measures, and the risk models derived from them, are completely useless once that transition occurs. Regulating them through these models isn’t good enough. The contents need to be tracked. Otherwise this will keep on happening. It’s guaranteed.

  32. You appear to be right! I was thinking CDS’s, but saying OTC’s. Also, got the dates off. Still, the point that whatever “derivatives” BB was talking about, and which Rubin is alleged to have ignored the problems of – were small potatoes in the 1999/2000 time frame, is a semi-valid “excuse” for Rubin, et. al.

    I have no idea what “Born’s concept release made no effort…” means. Everything I’ve read, which certainly is not everything, but does include a lot of Greenberger’s comments, indicate they – CFTC – were trying to get the stuff regulated and exchange-ized, and, were wanting the CFTC to do it – ’cause nobody else would.

  33. nadezhda wrote:

    “I’m a bit tired of hearing about Brooksley Born, the martyr of Bob Rubin’s ideology or cowardice or something. She may have been right, but Bob Rubin didn’t kill her. She committed suicide and didn’t have anything to show us for her self-sacrifice.”

    Wikipedia wrote”

    “In 2009 Born, along with Sheila Bair of the FDIC, 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”.

    According to Caroline Kennedy, “…Brooksley Born recognized that the financial security of all Americans was being put at risk by the greed, negligence and opposition of powerful and well connected interests… The catastrophic financial events of recent months have proved them [Born and Sheila Bair] right. Although their warnings were ignored at the time, the American people should be reassured that there are far-sighted public servants at all levels of government who act on principle to protect the people’s interests.”[10]

  34. Agreed. A phase transition/bifurcation is a concern, unless you do don’t mind swimming in chaos.

  35. Good idea. However, it also highlights the value of slowing things down with regulations.

    All systems are tradeoffs, one of the fundamental ones is between efficiency and durability (or sustainability). The more efficient a system is, the more fragile it is. I’ve yet to find an exception to that rule. And I’ve studied this specific tradeoff for over 10 years.

    Operating with maximum efficiency and maximum speed is not a way to produce a sustainable system. Globalization suffers from the same defective tradeoff.

  36. Thanks Jake,

    Can’t believe I got it “exactly” right. In fact when I was drafting up my understanding of the SIV I thought I might be entirely off-base. So its outright gambling, betting millions and even billions, of other people’s money, on the performance of an asset the counter parties do not own.

  37. Re: @ Bayard….Unfortunately when a new administration comes into power (office)it places its cronies as chairman of very powerful committee’s. What’s fasinating is that the loser just stays at status-quo with the grandiose minority chair! Quaint isn’t it? Did somebody say “Term Limits” – NOW!!!

  38. Re: @ Edwiw Lee…..When I look at my neighbor unemployed – its a recession. When I’m unemployed its a depression! Please not in my back yard? Just whose ox is getting gored? We’ll these lame excuses have now hit the “Mother Load”,…no one is safe,…there not builing anymore bridges – so where’s a family too live – as the steely compressed lightning speed anonymous fingerprints of an telling E’Mail,..spin a sad tale! Were all in it together man!

  39. I believe European regulation as opposed to US financial regulation requires a financial institution to seek permission before creating new instruments. If that is true it surely slows innovation but I would be interested in the opinion of the authors of positive regulation (European) rather than negative (American) regulation styles of banks. Would we suffer if we had these debates prior to trying new forms of financing? IS there another way to achieve a more robust, safer banking system that is practically possible to pass?

  40. There were and still are sustainable ways to minimize unemployment. Two things are needed to employ people: Infrastructure to support production of goods and services and demand for those goods and services. In the name of globalization we cannibalized the infrastructure while borrowing money to temporarily stimulate demand. Now we owe a ton of money to a handful of people and institutions, the demand has dropped, and should it go back up, it will create jobs outside the US where the infrastructure is. Thus, unemployment will stary high.

    Slowing things down would require us to build (and rebuild with the latest technologies) infrastructure which would then support employment in this country.

    The, eliminate all barriers to globalization sustains employment argument is not supported by evidence. We sustained employment for the last decade by borrowing to fight two wars and to finance a faux housing boom. The economy was sick in the 90’s, and only got sicker.

  41. @ Nadezhda

    Your first statement regarding Phil Gramm is absolutely correct.

    However, everything you’ve stated regarding Brooksley Born is WRONG! She did exactly what her responsibilities as Chair of the CFTC required of her.

    There has not been nearly enough (all most nothing!) written about Phil Gramm’s responsibility in passage of the CFMA in 2000. He was chair of the Senate Banking committee in 1998 and was the chairman that lambast Born following her published statement of the potential problems with derivitives. Gramm is a PHD economist. If anyone understood the potential problems he certainly did. Where is he now? He works for UBS. One of those very large investment banks. Congressional committees haul in Greenspan, Rubin, and others to try to get on the record what actually happened. Why don’t these committees call in Dr. Phil Gramm and ask him questions about his intentions and actions at that time? About his relationship to investment banks at that time? Although Clinton should have certainly vetoed the CFMA (if he had read it), Republicans controlled both houses of Congress in 2000. Given how Congress works, we all know the Chairman of the Senate Banking Committee has most of the power.

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