NWDG, I tend to agree with the first half of your last paragraph. After: - Until money is taken out of politics the problems will continue and even get worse as competition just drives everything. -, is when it falls apart. It seems rambling and incoherent, but from your previous entries I am guessing you are blaming everything on past and current Republicans. That is just ridiculous. I tend to agree with most of what the article author says. Various individuals from both parties and all walks of life are to blame.
Your view that the last 8 years are the sole reason for our troubles is some of the nonsense that the article tries to discredit. You give a half-hearted - democrats are not exempt - statement in parenthesis that isn't very convincing. I am totally for individual citizens (not entities with legal rights) having to support political campaigns. Taxing people to contribute to political campaigns seems wrong. Not everyone pays, and you are forced to support candidates you may despise.
I tend to agree your opinion of Thompson and Rudy G too.
No Change to Believe In
Finance is much the same as ever.
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The worst crisis since the Great Depression is entering its third year—the recession actually began in late 2007. Trillions of dollars have been lost worldwide, both on the balance sheets of financial institutions, and more profoundly in lost GDP and employment. Yet so far there is no serious legislation in the pipeline that would address the causes of the meltdown by radically overhauling the banking and mortgage-finance systems and regulating trade in risky assets like derivatives.
There are four reasons for the inaction. One is timing. Had President Obama been elected in June 2008 he would have responded to the emergency sooner. But because of the lag between the pinnacle of the financial crisis in the fall of 2008 and Inauguration Day of 2009, a change in leadership delayed decisive action.
That delay was compounded by the lack of a guiding vision. Obama was forced to choose his economic team at the depth of the crisis, when he had to pick names that would reassure the markets—players who knew how to pull the levers of power and could hit the ground running. That meant turning to veterans of the Clinton era, who were architects of several of the structural problems that exacerbated the trouble. Memories of past efforts by Robert Rubin and Larry Summers to squash derivatives reform, as well as Timothy Geithner's role in the bailout of AIG, certainly gave pause to the notion that finance would experience "change we could believe in." The price of selecting those with experience was resistance to reform.
Early on, there was no public outrage to break the resistance. The bank bailouts were controversial, but they were blamed on the outgoing president. Obama was elected on a platform of hope, change, and a suspension of cynicism toward government. Protest was put on hold, until the combination of huge bonuses and protections for bank executives—while Main Street suffered rising foreclosures, unemployment, and despair—ultimately ignited public anger. That sped up government action, but only late in the game. In retrospect, Obama could have used stronger public pressure earlier.
There are also intellectual obstacles to reform. For nearly 30 years, Ronald Reagan's idea that government is the problem has dominated American public discourse, undermining faith in the public sector. Free-market fundamentalism attacked regulation as inefficient, and denigrated bank supervision. When the crisis erupted, those attitudes were not going to change overnight. Unfortunately, the bailouts so far look an awful lot like crony capitalism, reinforcing cynicism about the ability of government to help. As of yet, no real vision has emerged to fill the void left by the failure of unfettered market capitalism.
Reformers need a clear vision to fight off the special interests. The powerful financial institutions that caused the meltdown continue to use a combination of public relations, lobbying, and campaign contributions to thwart reform efforts. Sen. Richard Durbin's recent lament that he could not pass meaningful foreclosure modification because "the banks own Congress" says succinctly what many Americans feel. For example, Congress seems unable to do much more than codify the existing unregulated state of over-the-counter derivatives. They are currently passing bills out of committee in the House of Representatives with loopholes so large that big banks can continue to spin complex webs of securities that protect their profit margins but shroud capital markets in the dark clouds of opacity that allowed risks to multiply before the current crisis. Perhaps public financing of elections is a precondition to meaningful bank reform.
Finally, there is the temptation of short-term coping without reform. To truly reform the banks is politically difficult and would diminish their earning power, particularly in the short term, and thus there is a perverse incentive to simply let them rebuild their balance sheets quickly at the expense of households, but without the underlying changes that would foster longer-term health. Having failed to enact substantial reform in the throes of the emergency last winter, Washington is opting to put air back in the bubble with massive stimulus spending and tolerance of continued abusive consumer practices on the part of banks, and financing of risk taking that is guaranteed by the FDIC and supported by zero interest rates. Sadly, it may take another, bigger crisis down to the road to create the impetus for the real reforms we need.
Johnson is director of economic policy at the Roosevelt Institute in New York and a former managing director at Soros Fund Management.
© 2009
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