On this anniversary of the failure of Lehman Brothers, President Obama is set to promise Americans that we will never again be laid waste by the speculative fevers of Wall Street. He is wrong. The nature of capitalism and of trading markets is that they are prone to excess, and the nature of politics is that no leader will ever choose to step in and squash an exuberant market. At such times, there is simply too much money on the table. Credit bubbles are like herpes; they never really disappear. There are ways in which the government can lean against these formidable truths, but it is highly unlikely that the regulatory overhaul under consideration will take us in that direction.
With his administration buffeted by charges of overreaching and fiscal intemperance, Obama will give himself a much-needed pat on the back for having brought the economy back from the brink. He is right to laud the efforts of Fed Chair Bernanke and Treasury Secretaries Paulson and Geithner. Some of their approaches worked, others did not. But there is no question that bold measures were necessary to prop up credit markets and reassure investors, or that the economy is surely in a safer place today than it was six months ago. The stock market, that ultimate arbiter of expectations, has rallied 50% from the March lows, giving the nation a welcome boost of confidence, while corporations everywhere are reporting that demand is stabilizing. We are not out of the woods entirely, but at the least we’ve been handed flashlights.
Obama will also use the financial demolition derby that erupted a year ago to press for increased government oversight of banks and greater international cooperation. Unhappily, the administration is quickly using its political capital to further a health care bill that Americans neither want nor understand. Obama’s ability to follow through on contentious financial proposals is being weakened by the day.
Already any notion that our foreign friends will unite in this effort is being dashed by the varying interests of those with sizeable financial industries (Great Britain) and those without (France, Germany.) French President Sarkozy is hopping mad that his plans for tight control of bank CEO pay have not been embraced by the G-20. Since his country is to banking what the U.S. is to baguette production, one suspects Mr. Sarkozy is milking this topic for political advantage.
At home, Congress does not will have the will to tackle the needed overhaul of our financial regulatory system; they have too much self-interest. The current structure has been described by former Treasury Undersecretary David Nason as having been “knit together over the last 75 years…We currently have five federal depository institution regulators, one federal securities regulator, one federal futures regulator and a state-based insurance regulatory system.” Earlier this year when the administration proposed some streamlining of this messy apparatus, (in the end only proposing eliminating the Office of Thrift Supervision) those in Congress charged with overseeing the various agencies screamed foul. Consider that in pursuing health care “reform,” the president doesn’t even dare demote state insurance regulators, even though allowing insurers to compete across state lines would enhance the much sought-after increased competition that supposedly necessitates the “public option.”
Meanwhile, the administration is attempting to give the Federal Reserve expanded powers to monitor risk levels in the economy. Not everyone in Congress is happy with this plan; the Senate Banking Committee is said to be favoring a council of regulators—a structure almost sure to be less effective. The concept is appealing, but we have seen time and time again that few see trouble brewing.
As it scrambles to plug oversight cavities that contributed to the financial collapse, the government has rightly focused on the largely unregulated and huge derivatives markets. It was, after all, credit-default swaps that led AIG to suck $180 billion from taxpayers. The proposals from Treasury Secretary Geithner avoided challenging the vested interests of those agencies responsible for the sector- calling on the CFTC and the SEC to work out the details. Good luck with that.
At the end, there are many reasons that the financial markets failed, only a few of which will be addressed by President Obama. He will not likely mention the contradictory charge given by Congress to Fannie Mae and Freddie Mac – shareholder-owned companies that were exhorted by Barney Frank and others to increase lending to borrowers with poor credit. He won’t focus on the performance of the credit rating agencies which pursued the luscious profits available by granting complex but ultimately faulty CDOs agreeable ratings. He won’t review the extinction of Glass-Steagall, which took place under the watchful eye of Larry Summers, and which allowed banks to become risk-taking institutions.
As this crisis melts into history, we will become increasingly careless of the issues which precipitated it in the first place – excess leverage being the most important. Just as we have become complacent about national security in the years that have passed since 9/11—what ever happened to all those proposals from the 9/11 Commission? – we will watch as Wall Street figures out another brilliant money-making plan that will become overblown and treacherous. Some would argue that the proposed gigantic deficits being generated by this government are already ginning up a future crash. Who will step in?
Liz Peek is a financial columnist and frequent contributor to the FOX Forum.