CFTC Chairman Gary Gensler spoke at the CME Global Financial Leadership Conference, focusing on past, current and future revisions to the regulations governing the swaps market. As in his previous speeches, Gensler began by explaining how the swaps market has dwarfed the futures market and went on to describe the major reforms of the swaps market.
Asserting that Adam Smith had focused on the importance of market transparency in The Wealth of Nations, Gensler stated that the first major reform was making the swaps market more transparent. According to Gensler, the public can now see the price and volume of each swap transaction as it occurs. Gensler went on to discuss how the swaps market now has mandated central clearing for financial entities and dealers, and also spoke about reforms for swap dealers, such as new business conduct standards for risk management, the documentation of swap transactions, and recordkeeping and reporting.
Additionally, Gensler discussed the significance of international coordination on swaps market reform and developments regarding customer protection, particularly the set of customer protection rules which were recently finalized by the CFTC. He concluded by discussing the future of swaps market regulation, once again mentioning that the CFTC needs more resources to continue its work.
Lofchie Comment: CFTC Chairman Gensler’s references to Adam Smith as a source of intellectual support for the CFTC’s regulation of swaps seem misplaced. As an economist, Adam Smith is famous primarily for advancing the notion of the “invisible hand”; of relying on private economic decisions to achieve the greater good. This seems inconsistent with the government-driven regulatory structure mandated (in part) by Dodd-Frank and further advanced by Title VII as implemented by the CFTC.
As to Adam Smith, here is a representative quotation from Mr. Smith:
“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever. . . .”
In fact, it seems that a more appropriate choice of economic philosopher for Title VII would be Nobel-prize winning economist Leonid Kantorovich. Here is a link to Mr. Kantorovich’s acceptance speech for his Nobel prize in economics in 1975: Mathematics in Economics: Achievements, Difficulties, Perspectives. Below is a quotation from the speech, which is illustrative of the theoretical economic difficulties raised by building grand regulatory structures that are created by government mandate.
“There appeared a necessity to shift from study and observation of [small-scale] economic processes and from isolated policy measures to systematic control of the economy, to the common and united planning being based on the common aims and covering a long time horizon. This planning must be so detailed as to include specific tasks to individual enterprises for specific periods and to that common consistency of the whole this giant set of decisions was guaranteed.”
The question for our system of financial regulation is the extent to which it is possible for the government or any centralized “intelligence” – even one managed by a Nobel prize-winner – to structure and maintain an efficient system that relies on heavy regulation in preference to the randomness of individual decision-making advocated by Adam Smith.
See: Chairman Gensler’s Speech.
Related speeches citing Adam Smith: CFTC Chairman Gensler Cites Adam Smith and Discusses Swaps Regulation (November 7, 2013); CFTC Chairman Gensler Cites Adam Smith in Defense of Dodd-Frank (November 1, 2013); CFTC Chairman Gensler Delivers Speech (October 30, 2013).