The indefatigable Brad DeLong has devoted his energies to singlehandedly protecting Larry Summers from the Internet (although, he makes pains to say, he likes Janet Yellen almost as much). Although I’m letting most of the Fed chair sideline debate pass me by, DeLong and others have raised one issue that played an important symbolic role in 13 Bankers and, more generally, the historical background to the financial crisis: Brooksley Born’s proposal to think about regulating OTC derivatives in 1998.It wasn't about 'regulating' OTC derivatives, as much as by whom the regulation was to occur. The SEC and banking regulators were more logical for financial instruments, than an agency set up to regulate soy beans and pork bellies. Brooksley Born was engaged in a typical Washington DC power grab, and the President's (Bill Clinton, btw) Working Group put it politely;
A cloud of legal uncertainty has hung over the OTC derivatives markets in the United States in recent years, which, if not addressed, could discourage innovation and growth of these important markets and damage U.S. leadership in these arenas by driving transactions off-shore. Recognizing the important role that derivatives play in our financial markets, and the dangers of continued legal uncertainty, the Working Group has spent the past six months focusing on OTCderivatives and examining the existing regulatory framework, recent innovations, and the potential for future development. At the request of Congress and the Chairmen of the Senate and House Agriculture Committees, we have prepared the attached report, which reflects the consensus we have reached on a set of unanimous recommendations.Nor is this much use in understanding 'the historical background to the financial crisis [of 2008]', since the discussion back in the late 1990s was about foreign currency and interest rate markets, not credit default swaps--supposedly the villain lately. CDS were pretty much unknown to Brooksley Born, Larry Summers, Alan Greenspan and everyone else, which is clear to those who've actually read the debates from the days of yore;
According to [Bank for Int'l Settlements], the vast majority of OTC derivatives are interest rate and foreign exchange contracts (72 percent and 26 percent, respectively); equity-related contracts make up only 2 percent of the market, while tangible commodities account for a fraction of a percent.The term 'credit default swaps' does not appear even once in the entire 35 pages of the document.