In today’s Financial Times, former Federal Reserve Bank chair Alan Greenspan pans the Dodd-Frank financial regulatory (2200+ page) reform act passed in July, 2010. Greenspan points out how complex and non-transparent the world of financial market is. He cites some negative effects of attempting to write rules for specific segments of the financial industry and for economic behavior. As you probably know, Greenspan largely argues that “markets will self correct.” His opinion piece, however, notes that there will be exceptions and that these will be difficult to anticipate. He does not pose any answers – how typical of Greenspan – nor does he suggest anything to avoid situations such as occurred in 2008. He does, however, concede that it would be worthwhile to attempt to understand the relationship between financial innovation and economic growth.
In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.