Former Federal Reserve Chairman Alan Greenspan said the Dodd-Frank financial reform bill had the potential to become the "largest regulatory-induced market distortion" since 1971 in a Wednesday op-ed for the Financial Times, leaving some financial experts astounded.
Greenspan took particular aim at the decision -- currently under debate at the Treasury -- to regulate the foreign exchange derivatives market. Doing so, Greenspan warned, could cause a large portion of the market to move overseas.
Foreign exchange derivatives are used by financial entities to hedge and make bets on currency exchange rates. According to the Office of the Comptroller of the Currency, trading in foreign-exchange contracts produced more revenue than any other type of derivative in 2010 -- yielding $9 billion at the nation's top five banks.
Proponents of derivatives regulation have argued that foreign exchange derivatives -- or forex -- should be subject to the same transparency and accountability rules as other derivatives.
"If this market is deregulated, it's going to be the candidate for blowing the next hole in the economy," said Michael Greenberger, a former director at the U.S. Commodity Futures Trading Commission. "[Greenspan's] article reads like it's written from another universe. And it essentially is playing with dice, because it assumes that we are out of all problems: that unemployment is fine, that people's pensions are in place, that the housing market is stable and that everything is fine."
Dodd-Frank was intended in part to set regulations in place that will prevent the derivatives market -- a notoriously opaque branch of the financial sector -- from causing another financial crisis. Whether forex is granted an exemption will likely be determined by Treasury Secretary Timothy Geithner, who has said he will make a decision on the matter in the upcoming weeks.
"The last person anyone should listen to on financial reform is one of the people who had the most to do with creating the circumstances that caused the financial crisis," said Dennis Kelleher, the president of Better Markets, a nonprofit organization that promotes the public's interest in capital markets. "Greenspan was a cheerleader for markets-know-best and governments-should-regulate-least. And that has cost the country and the world trillions of dollars, millions of jobs and untold financial losses to American families."
Walter Dolde, a finance professor at the University of Connecticut and an expert on derivatives, said he agrees with Greenspan that the threat of the forex market moving overseas could be real. He just isn't as concerned.
"Could some of the players get petulant and pick up their marbles and leave?" asked Dolde. "Yes, they could. Is that a bad thing? I don't think so. Then they become some other country's problem."