I have to come clean on regulation. Contrary to assertions about "left-wing economists," I am generally anti-regulation. When markets approach competitive conditions, they work best when they are left alone. Sometimes regulation and market intervention are needed to force markets into the competitive mold, at least approximately, but only when we are sure that the costs of market failure are sufficiently high to justify intervention. The threshold for intervention is fairly high.

I think Greenspan is getting a bad rap when he is criticized for being anti-regulation with respect to financial markets. Most of us were. Well, maybe I should speak for myself - I was. When you looked at the data and saw, for example, except for the S&L crisis, no or very few bank failures you wondered if there was enough competitive pressure in the industry. In a few years there were literally no bank failures in all of the U.S. At the time, it seemed like regulations such as those that prevented banks from paying interest on deposits above a set amount inhibited flexibility and helped contribute to disintermediation problems, and there were other regulations that also seemed to do more harm than good. If someone had asked me at the time if I thought we needed more or less regulation in financial markets I would have said less, except for a qualification about capital requirements for bank owners so they are not playing with other people's money with no stake of their own in the bet. That's a prescription for moral hazard and excessive risk taking. But there was a general belief among economists that modern financial markets could handle more competition, and a movement toward deregulation.



Maybe other economists saw things differently, I'll let them speak for themselves, but I have a hard time being critical of Greenspan as an individual on this particular point (and, in general, he gets too much credit/blame as an individual anyway). He was part of a deregulation wave, but he didn't start it. There is the Gramlich episode (Greenspan's response), but Greenspan didn't ride roughshod over others who thought we ought to intervene with new regulation, or who thought we should step up enforcement of existing regulation. Sure, he was a bit on the outer fringe in terms of the degree to which he believed in these ideas, not all of us were completely anti-regulation, but for he most part the general attitude was that we needed to deregulate whenever and wherever we could, and it's my impression that most economists supported this view, even those who are known to be "left-leaning."

My biggest complaint in the past was that we were failing to rein in market power, that's where I thought the regulators were falling down, by allowing too much monopoly power in certain sectors (I still think that). I believe regulators should intervene with new regulations or lift old regulations as needed to approximate competitive conditions - the goal of regulation is to make markets work better - but I can't say that I was worried about deregulation somehow leading to a market meltdown of the type we have seen recently (with respect to the present crisis, the problem was more the failure to enforce existing regulations or to impose new ones rather than deregulation). Monopoly power was my main worry.



Most markets don't collapse like this - they are self-regulating and can be left alone (and if they do collapse, the entire economy is not threatened) - but financial markets are different and that's something I won't forget again. I'm still not sure exactly how to prevent the build-up of common risk to the point where the entire financial sector and greater economy are vulnerable to a bad outcome, capital requirements, transparency, and better ratings agencies are a start, as is reducing the concentration of market power, but using regulation to prevent the possibility of systemic breakdown in the financial sector is something that demands more attention, and something I hope I - or we - don't overlook again. There are good ideas out there, and hopefully we can find a way to reduce our vulnerability to the problems associated with widespread failure in financial markets.