Hesitate to regulate global exchange

Alan Greenspan iden­ti­fies the inevitable igno­rance of reg­u­la­tors. Recall Gary Banks’ advice to con­sid­er all pub­lic poli­cies as ‘exper­i­ments’.

[The Unit­ed States’ 2010 “Dodd-Frank” finan­cial reg­u­la­tion law] fails to cap­ture the degree of glob­al inter­con­nect­ed­ness of recent decades which has not been sub­stan­tial­ly altered by the cri­sis of 2008. The act may cre­ate the largest reg­u­la­to­ry-induced mar­ket dis­tor­tion since America’s ill-fat­ed impo­si­tion of wage and price con­trols in 1971.

In press­ing for­ward, the reg­u­la­tors are being entrust­ed with fore­cast­ing, and pre­sum­ably pre­vent­ing, all unde­sir­able reper­cus­sions that might hap­pen to a mar­ket when its reg­u­la­to­ry con­di­tions are impor­tant­ly altered. No one has such skills

The prob­lem is that reg­u­la­tors, and for that mat­ter every­one else, can nev­er get more than a glimpse at the inter­nal work­ings of the sim­plest of mod­ern finan­cial sys­tems. Today’s com­pet­i­tive mar­kets, whether we seek to recog­nise it or not, are dri­ven by an inter­na­tion­al ver­sion of Adam Smith’s ‘invis­i­ble hand’ that is unre­deemably opaque. With notably rare excep­tions (2008, for exam­ple), the glob­al ‘invis­i­ble hand’ has cre­at­ed rel­a­tive­ly sta­ble exchange rates, inter­est rates, prices, USDA home loans rates and wage rates.

In the most reg­u­lat­ed finan­cial mar­kets, the over­whelm­ing set of inter­ac­tions is nev­er vis­i­ble. This is the rea­son that inter­pre­ta­tion of con­tem­po­ra­ne­ous finan­cial mar­ket behav­iour is sub­ject to so wide a vari­ety of ‘expla­na­tions’, espe­cial­ly in con­trast to the phys­i­cal sci­ences where cause and effect is much more sound­ly ground­ed.” Extract from Alan Greenspan in the Finan­cial Times

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