Obama Ducked Financial Reform
by Deacon Blues
The Obama administration released its financial reform package on Wednesday, to decidedly mixed reviews. It called for the Federal Reserve to be granted new and expansive powers to manage structural risk and deal with the "too big to fail" companies that previously were unregulated by the array of existing agencies each dealing with a portion of the economy. It also called for the creation of a new consumer protection agency for financial products, something the industry is already incredibly opposing as unnecessary.
But even after the plan was released, some observers noted that the proposals seemed to be watered down already and without the boldness that the worst financial crisis in 75 years may require. For example, there was no effort to consolidate the various regulatory bodies into a superagency with broader powers over the existing population of regulated players, aside from what was granted to the Fed. There was speculation that the administration expected a major fight from Congress over any attempt to strengthen and consolidate the executive branch's control over the economy, while Congress likes the existing splintered and scattered structure the way it is, allowing key members to have control over their own fiefdoms through committee assignments. So instead of fighting for the right thing and coming out with a strong proposal and then negotiating through a give-and-take and a position of strength that could easily be sold by a president with a mandate to go after Wall Street, the Obama folks gave up their negotiation advantages up front in a vain effort to please Congress.
Just like they've done on health care reform.
The Washington Post's Steven Pearlstein pointed out the flaws in what the administration produced:
I don't mean to minimize the political difficulty that would arise from confronting these issues. But given that we have just gone through the worst financial crisis in 75 years, one would hope that the government's response would be something more than an exercise in political triangulation.
It should have been grounded, first and foremost, in a thorough and independent analysis of how the crisis was allowed to develop and what regulators did and didn't do to prevent it, drawn from interviews under oath and internal records and made available to the public. That should have been followed by a detailed set of recommendations from a panel of seasoned regulators and independent experts on how the regulatory system should be reformed to prevent similar crises in the future.
Pearlstein is envisioning a truth commission on the financial meltdown, but he misses the two key reasons why the Obama administration would never have run something like this out of the Treasury Department, or anywhere else in the administration: 1) Obama has no stomach for looking backward and holding anyone accountable; and 2) his own Treasury Department and economic advisors could not conduct such an inquiry because they themselves were knee deep in responsibility for how we got here.
Instead, the Obama team, hoping to ride the wave of public outrage before it crested, determined to fashion a reform proposal even before a thorough analysis could be completed. And by deciding to contort and trim their proposal to accommodate the objections from powerful interest groups and key members of Congress, members of the Obama team have now made it politically acceptable for everyone to treat this as just another special-interest free-for-all of the sort that helped cause the crisis in the first place.
Paul Krugman noted that the proposals did nothing to deal with the perverse incentives that got us here, specifically with executive compensation and the bond rating agencies that played a key role in the meltdown. As a result, he has doubts about how well the proposals will avoid future problems.
I personally have no problem with the Fed being given broad new powers to manage the largest, most diverse firms, once the gutless decision was made by the White House to avoid proposing a total reorganization and centralization of the regulatory approach. It should be clear that in this case at least, the administration didn't want the job of regulating the largest firms to be left to executive-appointed regulators who can go soft on these firms, just like Bush's people did, and Obama put this into the lap of the Fed, beyond the reach of a president.
But why didn't Obama have the guts to be bold and use the mandate to demonize Wall Street a little, and stake out a solid negotiating position at the start with larger powers, instead of caving up front and coming up with something already lacking?