January 27, 2010
Even as Republicans are beside themselves with joy in the wake of Scott Brown's victory in Massachusetts last week, most economic indicators remain bleak, and investor confidence is flagging. In spite of renewed hopes in the GOP that the free enterprise system can still be saved, there's a lousy mood on Wall Street -- an interesting psychological contrast that bears pondering.
So far, the White House seems to be reacting to last week's defeat by adopting an even more populist rhetorical approach, bashing wealthy bankers for causing the nation's problems. There's more than a little truth in that, but still it's a risky road to take because it makes it hard to sustain a prudent course in economic policy. It will be interesting to see whether the President continues to use such crowd-pleasing words in his State of the Union Address later this evening.
In practice, however, Obama seems to be quite cautious, preferring to keep current government officials in place, as long as they have proven that they are "team players," not prone to spilling the beans about the bad underlying conditions. In that sense, Ben Bernanke is the perfect choice to remain as head of the Federal Reserve Bank, notwithstanding the fact that he has an abysmal record in overseeing the nation's financial system. But it seems that Washington elites on both sides of the aisle are circling the wagons to protect one of their own, and it now appears that the Senate will probably confirm him for a second term. Senator Max Baucus (D-MO), Joe Lieberman (I-CT), and Lindsey Graham (R-SC) will vote to confirm Bernanke for a second term, while Sen. John McCain (R-AZ) will vote against him. Ironically, MoveOn.org opposes Bernanke, while the U.S. Chamber of Commerce favors him. See the Washington Post. I have heard Bernanke testify any number of times, and while he may know what he's talking about, he just does not convey the firm sense of determination to fix glaring defects in our economy. He does not do well in the critical financial task of "moral suasion."
Another sign of the stay-the-course approach is that President Obama has recruited a former Reagan-era official, Paul Volcker, to sell a proposed new bank regulation system. The proposed "Volcker Rule" is an attempt to deal with the problem of banks that are "too big to fail." (Volcker was first nominated to chair the Federal Reserve Board by President Carter in 1979, and played a central role in defeating the menace of inflation during the 1980s, but he never got enough credit for it.) "Volcker's plan restricts "banks from making speculative investments that do not benefit their customers." (For example, hedge funds.) It would also limit bank consolidation, one of the prime examples of Alan Greenspan's "irrational exuberance" during the 1990s. From the Washington Post,
Volcker had been arguing that banks, which are sheltered by the government because lending is important to the economy, should be prevented from taking advantage of that safety net to make speculative investments.
In a sign of the troubled times, perhaps, Obama has embraced Volcker's proposal, marking what could be a truly momentous shift in economic policy. Time will tell.
Intentionally or not, the return of Paul Volcker to policy-making world has had the effect of undermining Secretary of Treasury Timothy Geithner. He may end up playing the role of "fall guy" for the Obama administration, and given the miserable shape things are in, they sure need somebody to do so. Ironically, when he was being vetted by Obama staffers for the Treasury job in late 2008 Geithner warned that he carried political baggage because of his role in the bailout of AIG and major banks. So who's in charge? This confusion over future policy direction provoked a large sell-off on Wall Street, as the Dow Jones tumbled four percent during the week.
The Volcker Rule addresses the perennial question of moral hazards, when public policies or private insurance creates a perverse incentive to be less responsible. If somebody else is going to pay for my mistakes, what is the point in exercising caution? Professor Bainbridge (hat tip to Bruce Bartlett) finds that the proposal "look[s] potentially quite reasonable." Unlike me, Bainbridge sees no need to bring back the Glass-Steagall Act (1933) prohibition on investment peddling by depository banks. But I do agree with him that the Obama's proposal will be a key test to see whether the Republicans in Congress are prepared to support needed financial reforms or will remain the "party of no."
Meanwhile, at Mother Jones (hat tip to Matthew Poteat), economist Joseph Stiglitz wrote an article on this very same subject, but it just seemed to miss the basic point. So, I commented:
That article brings to light a very real fatal flaw in our economic system, but Stiglitz seems totally confused. He says "Market fundamentalism has eroded any sense of community," blaming free markets and a "moral deficit" among bank bosses. He doesn't seem to understand that the moral hazard problem does not stem from the moral failings of individuals, but from lax institutions and practices. Government intervention to prop up failing enterprises is the very antithesis of laissez faire. Banks got lazy and sloppy because of misguided regulations and mandates that took away their discretion over making loans. That, coupled with the absence of any anti-trust enforcement since the 1980s, allowed crooked mega-banks to dominate the market, which led to the demise of (semi-) free market capitalism.
Stiglitz is right that financial leaders haven't learned much if anything from their near-death experience -- but why should they? Bush or Obama or whoever will bail them out in the end. The habit of "socializing losses as we privatize gains" (an apt Marxian critique) did not start in the last ten years, but has long applied to airlines, pro sports franchises, etc. Blaming "Market fundamentalism" for the sins of crony capitalism will lead to the wrong remedies.
I bet you never thought that Russia, Mexico, and Peru would achieve a ranking superior to the good ol' U.S.A. in terms of indebtedness relative to Gross Domestic Product. Altogether, the U.S. government owes $8.68 trillion, or 60.8% of GDP in the aggregate. Actually, Japan is even worse off than we are. Take a sobering look at the GDP vs National Debt by Country graphic at visualeconomics.com. This, in turn, raises the interesting question of whether or for how long countries can indulge the slide toward socialism; James Turk claims that "the ideological bankruptcy of socialism will be laid bare by government insolvency." He may be optimistic, however. Many countries in Latin America and Africa have continued with bankrupting socialist policies for years, astounding those who never dreamed that things could keep getting worse.
Here's good news, for most of us, anyway: "world poverty is disappearing faster than previously thought. From 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa." It really shouldn't be that much of a surprise, however, because until the last few years, there was a strong shift toward free market policies around the world, as part of the "neoliberal" wave. Gimme that good old (free market) religion! Contrary to left-wing populist dogma, markets tend to equalize differences among countries, though there is often a tendency to exacerbate inequalities in the wealthier nations, as the working class is forced to compete with dirt-poor peasants who are only too glad to work all day for a few dollars. See voxeu.org; hat tip to Bruce Bartlett.
A reasonable proposal to cut health costs was laid out by Dr. Charles Wheelan, Ph.D. He is pragmatic and refrains from any radical solutions, but he does at least recognize some of the biggest flaws in the current system and logical inconsistencies in Obamacare. See yahoo.com; hat tip to Dan.
Last week the Supreme Court issued a ruling (in Citizens United v. Federal Election Commission) that overturns statutory limits on donations to political campaigns by corporations. Generally speaking, I'm opposed to arbitrary limits on campaign spending, but the way this case was decided causes me concern. The justices seem to be saying that corporations enjoy free speech rights just as much as human individual citizens do. (What??!!) I hope they are not inventing a new right, as the justices who voted for Roe v. Wade in 1973 did. See the Washington Post.
By the way, Citizens United is the PAC run by conservative activist David Bossie. He gained fame attacking Hillary Clinton a couple years ago (perhaps helping Barack Obama get elected?), and last year I finally received the video on Hillary that his organization promised me -- about a year too late.
I swear, I'm NOT making up this latest cybernetic initiative from the Obama White House: expectmore.gov; hat tip to Connie. Was that a Freudian slip, or perhaps a taunt? In fairness, I think they are trying to convey the idea that the government should live up to people's expectations.