Accessibility links

Breaking News

Financial Crisis Leads to Calls for Increased Market Regulation

With global credit markets still not operating normally, there are increasing calls for tighter regulation of the complex financial derivatives that lie at the heart of the crisis. VOA's Barry Wood has more.

Former New York Stock Exchange Chairman Richard Grasso says the financial crisis is almost certain to lead to increased regulation of derivatives - financial instruments whose value is based on the market value of an underlying asset such as stocks, bonds, commodities or currencies.

Speaking on Bloomberg Television Monday, Grasso said it is inexcusable that complex instruments like credit default swaps - insurance on bonds - were unregulated. Beyond that, Grasso says that in the United States financial market regulation is fragmented and weak.

"We're going to have a massive undertaking in the new year," said Grasso. "Whoever wins the [U.S. presidential] election, I think both sides of aisle [both political parties] recognize that we have to step back. A 1930s regulatory apparatus doesn't work in the 21st century."

During his 18 years as head of the Federal Reserve Board (until 2006), Alan Greenspan was an outspoken opponent of increased regulation of financial derivatives. He argued that financial institutions would regulate themselves, because it was their money that was at risk.

Appearing before a U.S. congressional committee last week, Greenspan told lawmakers he was shocked that banks failed to adequately protect themselves.

"I made a mistake in presuming that the self interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and the equity in the firms," said Greenspan.

The financial crisis surfaced about 14 months ago when defaults on home mortgages in the United States led to banks incurring large losses on mortgage-backed securities.

Admitting doubts to some of his free market beliefs, Greenspan said the financial crisis challenges the view that lightly regulated markets are the most efficient.

Market analyst James Grant says Greenspan was over zealous in believing that markets are self-correcting.

"Greenspan, in a very unwise left-brain way, imputed pure rationality to markets," said Grant. "And you know, they're just as rational and just as efficient as the people who operate in them."

Former stock exchange chairman Richard Grasso says the fragmented U.S. regulatory structure needs to be centralized and strengthened.

"Policy makers from Fed [the Federal Reserve, the U.S. central bank] to Treasury to the SEC [the Securities and Exchange Commission], to CFTC [the Commodity Futures Trading Commission], to the FDIC [the Federal Deposit Insurance Corporation] all recognize that now is the time to take a serious approach to having a single regulator to oversee all products in all [U.S.] markets," he said.

As the crisis that began in the United States has had global fallout, the perceived need for coordinated international regulation will be discussed when leaders of 20 advanced and developing economies - the Group of 20 - meet in Washington on November 15.