Obama–for reasons that I think have a lot to do with the tastes of his advisors (i.e., Rahm) and Obama’s own comfort with Ivy Leaguers, rich people, and elites–has strangely kept his hands of Wall Street since taking office. In fact, he’s rolled over on so many things that the occasional noises from Ron Paul types about the two party system being bought and paid for made more sense than usual, e.g., continuation of AIG bailout, Federal Reserve purchasing of MBS assets, renewal of Glass Stegal, raiding the FDIC to offload MBS assets, and permitting newer and less regulated entities to use the Federal Reserve’s “discount window.” His occasional noises about compensation and the “fat cats” always sounded a little out of tune under the circumstances. He’s much more comfortable apparently chewing out a middle class Cambridge cop than he ever would be going toe-to-toe with the barons of finance. After all, his two constituencies in Chicago were elite liberal whites not so different from Wall Streeters and poor and not-so-poor blacks in Hyde Park. Country club WASPs and working class ethnic whites always seemed to be the groups with which he was the least comfortable and towards which he was the most hostile.
In some ways, this reluctance by Obama to mess with Wall Street is good. Democrats tend to conflate productive wealthy people who invent things and cure diseases and build businesses with those whose only contribution is gambling with OPM (other people’s money). For many Democrats, they’re all just “the rich,” which is frankly a stupid view of things. On the other hand, a goodly swath of Wall Street has become little better than naked, bankrolled speculators in the last ten years, maybe more. Conservatives who favor free markets and limited government must recognize that Wall Street is anything but; it has access to artificially cheap fiat money, its cronyism and various schemes to evade regulation and accountability are legendary, and its largest institutions have never hesitated to get special treatment that a gas station or car dealership in the hinterlands could never obtain.
Finance must be kept in a fairly narrow lane, or a free society is doomed. Unregulated banks and publicly bankrolled speculators threaten systemic disaster. This is particularly so with the unstable combination of a fiat currency, a central bank, and a cozy relationship of our deficit-running government and the insider game of public finance. (Very few entities are treasuries dealers, and the entire market is opaque).
While getting rid of the banks (and pseudo-banks’) “prop desk” is a step in the right direction, but what is missing is what is really needed: a reduction in government deficit spending, rules to promote transparency, a reduction in the size and power of any one financial institution, reduction in leverage at all levels so no one is “too big to fail,” the end to AIG’s subsidy (which is really a Goldman Sachs subsidy) so that the big real estate gamblers of the recent past have to take their lumps, and finally some kind of compensation reform for entities that have a significant impact on financial markets, perhaps rules that requires greater personal stake and personal guarantees among those who would invest with OPM. Sensible rules that limit systemic failure, volatility, harm to our industrial capacity, and financial security are difficult to devise. Not surprisingly, it sounds like Obama’s rather late fussilade at the prop desk will not accomplish much.
But the conservative crusade for deregulation never meant and never should have meant no regulation. Even in the so-called Golden Age of limited government, panics were frequent, and large scale malinvestment and crises were not uncommon, i.e., 1875 (basically a European real estate speculative frenzy), 1905 (bank lending fueled stock speculation), and 1919 (government debt plus kooky monetary policy). On the other hand, while some of the redistributionist nonsense of the New Deal was ridiculous and ineffective, the order imposed on financial markets and banks by the SEC, CFTC and other institutions, coupled with the FDIC’s protections for small depositers, did a lot to ensure the post-war stability of America’s financial markets and economy. Perhaps none of this would be necessary if we had a real gold standard. But it’s simply counter-factual to see these limits as all bad and for conservatives to mindlessly conflate those who produce things and create wealth with those whose wealth-making has no real public benefit or positive externality. Even Michael Milken could point to some new businesses like CNN as a product of his so-called junk bond creations. What has MBS, CDS, and the subprime frenzy wrought other than the worst recession since the Great Depression.
Our unregulated trade and unregulated publicly subsidized financial institutions have operated to completely fleece the middle class: outsourcing and displacing American workers, stagnating wages, destroying our manufacturing sector, whip-sawing housing values, and strengthening an alien and hostile communist regime that we could have easily isolated 15 years ago at the end of the Cold War. Most important, this out-of-control system has put millions of hard-working and productive people out of work.
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“What has MBS, CDS, and the subprime frenzy wrought other than the worst recession since the Great Depression.”
Their achievement was to transform an asset once usually held by local banks – a home mortgage – into something that could easily be sold to investors around the world. Obviously, it didn’t work out too well in this particular case. And yes, the combination of fiat money, government bailout and collusion, and gaming of the regulatory system has created a monster on Wall Street.
On the other hand, the efficient flow of capital is not a neglible thing. I think writing off all the innovation that comes out of Wall Street as nothing more than vampire economics is a bit unfair. In recent years, the focus on overly complicated derivatives did become little more than a gambling operation. At the same time, however, Wall Street figured out how to use global investment to feed an insatiable demand for credit that was created by the American people.. not by Wall Street.
It sounds like you prefer the European continental model, where finance is controlled more by heavily regulated banks than by highly leveraged finance firms. I’ll admit that there are some attractions to this model, particularly in stability (although they too can make their share of stupid and risky investments). The downside is that capital is more tightly controlled by patronage and established relationships and flows less easily to new companies and new ideas. Part of the dynamism of our economy comes from our financial industry, and we will lose that if we transition to a European model.
To add to my comments above, I think the best solution is to go back to the strict separation between banks and finance firms, rather than to effectively dismantle the finance firms.
It seems we have gone in the opposite direction though.
I only partially blame Wall Street. The real failure is in central banks loose monetar policy and our “asleep at the switch” regulators. I do think though that Wall Street is very adept at using the older American rhetoric of free markets and enterprise to defend something that is totally different in character and social effect.
Follow the money. Speaking of which, 100 bucks says Obama got wads of cash in campaign contributions from the Goldman Sachs crowd.
Somebody check the math.
Any noise he’ll make against the monied class will forever be, well, counterfeit-Geithner is the silent Svengali by his side, ensuring that main street populism never trumps wall street profits.
Geithner is a tool of the NYC financial culture. He’s weak.
“He’s much more comfortable apparently chewing out a middle class Cambridge cop than he ever would be going toe-to-toe with the barons of finance.”
Most people have figured that out, which is why Obama’s poll numbers are tanking.
When Officer Crowley got slammed in that presidential press conference, people started to get the sense that Obama is a bully. People hate bullies.