Saturday, March 29, 2008


Barack Obama spoke on the economy in New York on Thursday. He placed the call for increased supervision of the financial sector in historical context:
[T]he American experiment has worked in large part because we guided the market's invisible hand with a higher principle. A free market was never meant to be a free license to take whatever you can get, however you can get it. That's why we've put in place rules of the road: to make competition fair and open, and honest. We've done this not to stifle but rather to advance prosperity and liberty. As I said at Nasdaq last September, the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well-being of American business, its capital markets and its American people are aligned. I think that all of us here today would acknowledge that we've lost some of that sense of shared prosperity. Now, this loss has not happened by accident. It's because of decisions made in board rooms, on trading floors and in Washington. Under Republican and Democratic administrations, we've failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practice. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both. Nor is this trend new. The concentrations of economic power and the failures of our political system to protect the American economy and American consumers from its worst excesses have been a staple of our past: most famously in the 1920s, when such excesses ultimately plunged the country into the Great Depression. That is when government stepped in to create a series of regulatory structures, from FDIC to the Glass-Steagall Act, to serve as a corrective, to protect the American people and American business.

Ironically, it was in reaction to the high taxes and some of the outmoded structures of the New Deal that both individuals and institutions in the '80s and '90s began pushing for changes to this regulatory structure. But instead of sensible reform that rewarded success and freed the creative forces of the market, too often we've excused and even embraced an ethic of greed, corner cutting, insider dealing, things that have always threatened the long-term stability of our economic system. Too often we've lost that common stake in each other's prosperity. Now, let me be clear. The American economy does not stand still and neither should the rules that govern it. The evolution of industries often warrants regulatory reform to foster competition, lower prices or replace outdated oversight structures. Old institutions cannot adequately oversee new practices. Old rules may not fit the roads where our economy is leading. So there were good arguments for changing the rules of the road in the 1990s. Our economy was undergoing a fundamental shift, carried along by the swift currents of technological change and globalization. For the sake of our common prosperity, we needed to adapt to keep markets competitive and fair. Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one, aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy.

Of course, some of that "legal but corrupt bargain" was struck while a certain Clinton was in office...

Robert Kuttner and Jared Bernstein were both enthusiastic about the speech, and vexed that Paul Krugman was not (consistent with his general attitude towards Obama).

On housing, Obama (and Clinton) have been supportive of the proposals by Rep. Barney Frank and Sen. Chris Dodd. They would allow people with "under water" mortgages (i.e. who owe more than their houses are worth) to re-finance into mortgages guaranteed by the Federal Housing Administration. The value of the new loans would be limited to 85% of the previous loans, so the current lenders would take a hit, but they would escape the risk of taking a much larger loss from a foreclosure. The Bush administration seems to be moving in the same direction. But McCain is not; he says “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

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