CFTC Chairman Gary Gensler spoke at the 2013 Annual Glauber Lecture at Harvard University, reiterating themes he has covered in past speeches regarding swaps market reform. Chairman Gensler again described the major components of swaps market reform, including:
- swap dealer oversight;
- international coordination; and
- benchmark interest rates.
He closed by stating that the CFTC is not sized to the task of overseeing the markets, calling for additions to the CFTC staff and budget.
Lofchie Comment: For readers who want to take a fuller look at the Chairman’s speech, I note that Chairman Gensler cited economist Adam Smith in a way that I thought interesting, even if the connections that Chairman Gensler made were not clear to me. First, he referred to Adam Smith’s treatise, The Wealth of Nations, as the book in which Smith wrote about the “benefits of lowering the price of information,” and went on to say that “if you make information free, the economy benefits.” While I don’t actually remember Smith writing about lowering the price of information, my failure of memory is not important. More significantly, the problem with this aspect of Chairman Gensler’s economic theory is that information is not, in fact, free. In fact, it costs tremendous amounts of money to discover, and even more to record and report to the government. Likely hundreds of millions of dollars will be spent providing the CFTC with all of the information that it demands. The fact that the government mandates the production of this information, which is produced at great expense to the market, and makes it available to the world does not make the information “free” in an economic sense. More significantly, it does not make the information, or the cost of producing the information, worthwhile; i.e., that is why a cost-benefit analysis of regulatory rules is generally required and sometimes performed.
As to the benefit side of the equation, for all of the CFTC’s claims as to the benefits of transparency through “free” information, there is no link of which I am aware between the transparency of information as to swaps pricing and the financial crisis. The problem is not that swap prices were hidden; the problem is that prices of physical assets (houses) were (in retrospect) too high.
Further on the topic of “free,” Chairman Gensler goes on to say that “if access to the market is free, everybody gets to compete.” Isn’t that an argument that runs against everything in Dodd-Frank? That is, Dodd-Frank imposes very substantial regulatory costs on swap dealers and on users of swaps. Whatever arguments may be made in defense of swaps regulation, the last thing in the world that it does is make access to the market “free.” In fact, one obvious result of the costs imposed by Dodd-Frank is that midsized dealers and small customers would seem likely to exit the swaps market entirely. (It would be sensible for the government to do a survey on this issue.)
It is a tribute to the high place that Adam Smith holds as an economic theorist that Chairman Gensler chooses to cite to him in defense of Dodd-Frank. Still, one thinks of Adam Smith as a “liberal” (in the 18th-19th century “invisible hand” meaning of that term), and thus it is surprising that he should be cited in defense of a statute that is perhaps the ultimate in big regulation: a law that runs 2000 pages with rules that will likely run to 200,000 before we are done, all of it in support of a very visible hand.
See: Chairman Gensler’s Speech.
See also: CFTC Chairman Gensler Speaks on Swaps Market Reform (October 23, 2013).