Lonesome Hobo Visits Wall Street – and Gets the Obama Speech


9-21-09, 8:44 am

...Kind ladies and kind gentlemen... Stay free from petty jealousies Live by no man's code And hold your judgement for yourself Lest you wind up on his road...

Bob Dylan, JWH, Lonesome Hobo 1967

Obama's main points:

1. The rescue of the financial system was necessary.

I agree with him. Wall Street and Main Street are closely linked. Now, the government's public stake in some huge banks bailed out gives it the right and responsibility to – at the minimum – curb excessive risk, especially in non-productive investment.

2. The wreckage of the near-collapse of the financial system is already worldwide and deep, and severe recession has followed. 'Five trillion dollars of Americans’ household wealth evaporated in the span of just three months,' as Obama said.

Some on both the left, and Libertarian, sides of the political stream, are quick to oversimplify the current crisis as a cyclical crisis of overproduction, ho hum, 'that's capitalism,' love it or leave it. But I think there is more going on. There is a powerful structural crisis as the economy struggles to find new ways to pursue the ongoing diffusion of more efficient technologies into the marketplace, with the constraint of a much weakened financial sector. The scale of public and regulatory intervention needed for this to happen must go far beyond management of a business cycle. The scale of debt already taken on – maybe 70 percent GDP – is not unprecedented (110 percent in World War II) – but its huge nonetheless, and we are hardly at the end of the road. The 1930's represented a comparable but not identical era of structural and financial crisis followed by major institutional and regulatory interventions.

3 Despite the wreckage, and the huge sums of public money injected into the financial system,

'Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. History cannot be allowed to repeat itself.'

Was he surprised? The biggest banks are now...even bigger.

4. Obama goes on to state his principle that will govern public intervention: 'clear rules of the road that promote transparency and accountability. That’s how we’ll make certain that markets foster responsibility, not recklessness, and reward those who compete honestly and vigorously within the system, instead of those who try to game the system.'

It remains to be seen a standard of transparency and accountability will be sufficient. Yes, it will help reduce risk, which is important. But will it solve 'too big to fail'? For ordinary commercial lending operations that match borrowers to savers – these need to be heavily regulated, much like a public utility, to remain low risk.

Investment banking is a different and very diverse animal. Public investment priorities have a big impact through the federal budget. These priorities, like rapid mass transit expansion, are beyond the capacity of private investors At the same time, private investment banking has historically played a key role in introducing innovation into the real economy with sustainable business models. However, its excesses are well known, and for a time, they need to be a much smaller part of the economy, busted back to partnerships from corporations, so they have some skin in the game when they are placing their bets with other people's money. We can let them loose some time in the future when there is better fuel for them to burn than their own gas!

Many Obama critics propose that reform go much farther than transparency, including a major reorganization of the banks so that the commercial sector does indeed functions as a pubic utility, and investment banking is broken up and made smaller. Many support adoption of EU style bank regulation to stabilize world finance (opposed by US and UK). Many believe 'too big to fail' means TOO BIG. Period.

Of course the banking lobby has already proven itself more powerful than the insurance lobby – and look what the latter is doing to health care reform efforts. So perhaps strong transparency is the only dog that will currently hunt.

The Consumer Financial Protection Agency (CFPA) is the most important reform proposal, empowering regulation of credit markets in commercial as well as the shadow and investment banking worlds. Enhanced resolution authority gives the government the power to take-over insolvent institutions outside commercial banking and dispose of their assets in an orderly way. Establishing increased powers for the FED, but increased oversight over the Fed and cooperation with EU efforts to impose greater global capital controls (lowered risk) on all banks round out the list.

Obama got a cold reception for what many might think modest demands. But polite. Hard to expect the bankers to be happy being told they will have to adopt policies making them get smaller. They will clearly mobilize to bring hell to breakfast trying to defeat them.

More than one commentator has remarked that all the reforms sought by the President could arguably been implemented under current law, but Bush simply chose not to. There is some truth to that, but the staunch opposition to CFPA by the banking lobby shows where they stand on 'accountability' – and a new legislative mandate on financial reform and its mission are needed.

Of course, no matter how successfully a new reform regime is navigated – a time will come when ITS compatibility with requirements of the NEW, NEW thing will be challenged! Best case though: we will get 50 years of improved stability and rising incomes. Worst case: Lets don't go there.