The ghosts of Greenspan's past stalk Obama financial plan

For far too long, regulators weren't willing to regulate, inspired by the view of the former Federal Reserve chairman that too much oversight is a greater threat to markets than too little. That turned out to be a bigger cause of the credit crisis than the particular structure of the agencies overseeing the financial system.

Donald Kohn, the Fed's vice chairman, summed up the prevailing regulatory attitude in 2005, saying, “The actions of private parties to protect themselves - what chairman Greenspan has called private regulation - are generally quite effective,” while government regulation risks undermining “financial stability itself.”

Unless Obama can change that mindset, which is entrenched in many of the institutions overseeing banks and markets, the details of his 88-page reform plan won't matter much.

And while there appears to be a newfound appreciation for government oversight, we can't be certain yet about the intentions of those shaping the Obama plan. Some of them, after all, were one-time advocates of Greenspan's views, or at least failed to challenge them.

Greenspan's Disciples

Treasury Secretary Timothy Geithner, one of the architects of the Obama overhaul, was a big promoter of the kind of so- called financial innovation that ultimately helped bring about the crisis.

During a speech in early 2007, Geithner argued that innovative products such as credit default swaps and collateralized debt obligations “should help make markets both more efficient and more resilient.”

And Geithner, at least back then, echoed Greenspan's belief that regulators shouldn't try to stop bubbles from forming. In the same speech, the then-chief executive of the Federal Reserve Bank of New York also said, “We cannot identify the likely sources of future stress to the system and act preemptively to diffuse them.”

Geithner wasn't alone in espousing Greenspan's hands-off approach. His co-pilot on the new Obama plan, National Economic Council Director Lawrence Summers, held similar views.

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