Thursday, March 26, 2009

The Baby and the Tiger

News reports of the outlines of the Obama Administration's plans to create a new regulator of systemic financial risk prompt me to post the opening paragraph of a book chapter I'm currently writing:
“I believe in the stock exchanges,” declared the New Deal lawyer Thomas G. Corcoran in a congressional hearing on the bill that became the Securities Exchange Act of 1934. “I do not believe you should kill them. I do believe you should regulate them–not because I have any social philosophy in regard to the subject–but because as a sheer matter of economic wisdom they should be regulated.” Speaking not long after the Dow Jones Industrial Average fell 89 percent and unemployment reached 25 percent, Corcoran charged that unregulated financial markets “have cost many millions of dollars; they have cost 12,000,000 men their jobs.” With the lawyer for the New York Stock Exchange glowering nearby, he defended the sweeping power the legislation would give federal administrators. The stock exchanges “cannot be expected tamely to submit to regulation,” he declared. To create a commission to regulate America’s financiers and not to endow it with broad powers was to “put a baby into a cage with a tiger to regulate the tiger.” The danger was all too real that “the stock exchanges and the forces allied with stock exchanges, which are supposedly being regulated, will actually regulate the regulators.”
The source is Senate Committee on Banking and Currency, Stock Exchange Practices, 73d Cong., 2d sess., February 27, 28, 1934, 6574, 6467.