Obama on Regulation

Ed Kilgore reads Barack Obama's speech on financial regulation and says "what struck me most in a quick reading of the speech was Obama's distinctly 'third wayish' thematics on government's role in regulating the economy." What struck me was the digs at the actually existing third way regime of the 1990s, when a certain someone's husband was president, and when Obama says the powers-that-were betrayed the vision of a mixed market approach in favor of run-amok corporate power:

Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one – aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy.

Deregulation of the telecommunications sector, for example, fostered competition but also contributed to massive over-investment. Partial deregulation of the electricity sector enabled market manipulation. Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses and otherwise engage in accounting fraud to make their profits look better – a practice that led investors to question the balance sheet of all companies, and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment.

A decade later, we have deregulated the financial services sector, and we face another crisis. A regulatory structure set up for banks in the 1930s needed to change because the nature of business has changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.

I'll be interested to see what he has to say about it, but this reads to me like an effort to co-opt some of Bob Kuttner's critique of Clintonism by assuaging doubts that an Obama administration would mean more of the same, while still remaining true to a basically technocratic role for economic policymaking.

Comments

I don't know who wrote this, but this is a remarkably cogent, remarkably sophisticated series of things for a presidential candidate to say.

Posted by jayackroyd | March 27, 2008 1:34 PM

If digs means telling the truth, so be it. The fact is that it was in the 90's that deregulation built up a head of steam, to be increased under Bush.

Notice that not once did Obama say either Clinton's name.

Posted by john m | March 27, 2008 1:54 PM

Glass-Steagall Repeal when Clinton handed the keys to Sandy Weil of Citibank.

Go to PBS and search Glass-Steagal.

Posted by eh? | March 27, 2008 1:56 PM

Glass-Steagall Repeal when Clinton handed the keys to Sandy Weil of Citibank.

Go to PBS and search Glass-Steagal.

Posted by eh? | March 27, 2008 1:56 PM

Actually, I think one of the best parts of the speech was when he talked about regulating types of activity rather than types of corporations. Part of the problem was that banks had regulations concerning mortgage lending, but brokers and mortgage companies did not, which is plain foolishness.

Posted by john m | March 27, 2008 1:57 PM

I thought Clinton gave an good (maybe excellent?) speech last week in Philadelphia on the economy, but I was much more impressed with this one.

Clinton's speech did have more concrete proposals - but after listening to Obama's speech, I can't help but wonder if all her bullet point policy proposals are merely short-term patches to some potentially serious long term problems.

In the end a president may have to settle with short term fixes from Congress, but that should preclude him/her from having a long term vision of the solution.

Posted by direwolfc | March 27, 2008 2:00 PM

"Clinton's speech did have more concrete proposals - but after listening to Obama's speech, I can't help but wonder if all her bullet point policy proposals are merely short-term patches to some potentially serious long term problems." - direwolfc

This, my friend, is the choice before Democrats in a nutshell. Either candidate will be an improvement from Bush. But Obama offers at least the chance of really fixing some longstanding problems that are the result not just of specific policies, which Clinton would perhaps change as well, but entire ways of thinking, which she would certainly not.

Posted by TH | March 27, 2008 2:11 PM

I don't know who wrote this, but this is a remarkably cogent, remarkably sophisticated series of things for a presidential candidate to say.

Exactly. It's a trap.

Gotta be. I've seen presidential candiates speak, and they don't do it like that.

Posted by joe | March 27, 2008 2:45 PM

i think there are some real problems with the specifics here: for example, what obama calls "massive overinvestment" some others (me, for example) would call "the reason your cell phone calls are so cheap, cable companies are offering nice bundling packages, and youtube is flourishing."

similarly, i'm not sure what the regulatory environment had to do with enron: fraud, amazingly enough, flourished before the 1990s.

and, of course, the repeal of glass-steagall had been called for (and argued over) for a very long time and has little to do with our current problems, which derive not from "banks" but from "bank-like" entities.

this is the obama promise - and obama risk - in a nutshell: i can appreciate the desire to redefine the political landscape, but at the same time, obama (in, in my estimation, his worst moment) is the guy who assured us that he wouldn't have lost so much congressional ground to the gop in the '90s, a nonsensical remark (which, happily, he hasn't repeated to my knowledge).

just as clinton made a fundamental error resting so much on "experience" rather than "vision," obama is making a fundamental error in running down the '90s just to prove what a different voice he is. the last charismatic young politician to get elected was jfk: he didn't change the landscape an inch.

if he wants to take on the right wing, you know, he should take on the right wing....

Posted by howard | March 27, 2008 2:46 PM

Howard, compared to most of the world your cell phone and cable services aren't cheap.

And what you call nice bundling I call monoply driven price gouging. From Comcast I want an HDTV reciever, internet, HBO, ESPNs, TNT, Sci Fi, Comedy Central, local Sports (CSN and FSN in my case) and the NFL network. The cheapest option for all that is a total package that gets me a ton more channels I never watch and costs $176 a month.

Posted by Eric k | March 27, 2008 3:13 PM

Howard:

"if he wants to take on the right wing, you know, he should take on the right wing...."

Not sure what you mean here. Clinton's husband took industry money and signed Phil Gramm's bill with repealed Glass-Steagel, b/c, you know, regulation is bad no matter what. Clinton herself believes Greenspan, part of the problem, should be consulted on what to do to fix the problem.

Fact is it's over, even if Clinton's big money donors are still trying to extort the DNC.

The history of race relations in North America will be written as such: the Middle Passage, slavery written into the Constitution, Abolition movement, Civil War, Jim Crow, Civil Rights Movement, first black President inaugerated in 2009*

*he won a close Democrat primary in which a former first lady tried to "Tonya Harding" him.

Posted by Peter K. | March 27, 2008 3:15 PM

I would have said the last young charismatic politician to get elected was Bill Clinton.

Fraud existed before the 1990's, it is true. But the abandonment of accounting principles established for decades in favor of models that worked so long as commodity prices never increased did lead to Enron being able to pull the wool over the eyes of investors for a lot longer than they would have a generation earlier. Similarly, the relaxation of regulations on separation of duties led to auditors too cozy so as to not antagonize management and lose consulting revenues led to a complete failure of the accounting industry to do its job.

Fraud has existed for as long as humans have engaged in commerce, but that does not mean that there were not very particular changes in the regulatory environment of the 1990's that made the frauds perpetrated by Enron and Worldcom much easier to pull off.

Posted by Curtis | March 27, 2008 3:23 PM

A couple of things struck me about the speech:

Obama's argument is that intelligent regulation is a pragmatic response to problems in the market. For example the Pure Food and Drug Act of 1906 helped producers and consumers because it assured consumers that the meat was safe to eat and therefore it increased demand. Likewise, no one wants to buy financial instruments because no one is sure what they are worth.

Obama is like the best professor you ever had in college, making complex issues clear without reducing the complexity to where it no longer fits reality. No wonder college kids love him, they want him to be professor-in-chief. After the last eight years, I would wecome a president with his analytical and rhetorical skills along with his calm demeanor.

Posted by avn1 | March 27, 2008 3:44 PM

"Clintonism"

Uh huh.

(It's not like we're saying she played that gym teacher on the first season of DeGrassi Jr High Linus or that she had any role in the mysterious blowing away by persons unknown of that Foster fellow.)

Oh no.

Posted by Linus | March 27, 2008 4:20 PM

The real story is that John McCain claimed that "the role of government is to help the truly needy, prevent systemic economic risk, and enact reforms that prevent the kind of crisis we are currently experiencing from ever happening again. Those reforms should focus on improving transparency and accountability in our capital markets -- both of which were lacking in the lead-up to the current situation."

Posted by Mike | March 27, 2008 6:07 PM

I like Obama a lot, but the problem with this snippet of the Obama speech is that the ills of Enron and WorldCom (accounting fraud) are not the product of the proclaimed causes (energy and telecom deregulation). Accounting fraud is not a natural result of these kinds of deregulation, though clearly deregulation enhances market opportunities and might increase willingness to engage in fraud to expand into other markets. As such, Obama's argument casts too wide a net and, it seems to me, detracts from some important overall points. I'll have to read the entire speech when I get a chance.

I agree that Glass-Steagall repeal went too far and that the absence of sufficient regulatory resources has enabled bad risk taking. But that is a different industry that poses substantially different sorts of risks than telecom and energy deregulation. (By the way, that conservative scion Ted Kennedy was a major proponent of airline and trucking deregulation in the 1970s).

It might do well for Democrats to remember just how badly we've fared in presidential elections since 1964 and that some of the moderate impulses of Clinton were important for having a friendly (but imperfect) face in the White House for the first time in a very long time. We've gotten crushed in a lot of elections with liberal candidates (Humphrey, McGovern, Mondale, Dukakis), so maybe Clinton's triangulation, while irksome, generated a lot better outcomes than the alternative.

While this should be a great year for Democrats given the state of the economy and Bush's unpopularity, I think we should be careful to distinguish between Democratic success as an endorsement of liberal politics or the Democratic platform and Democratic success as a rejection of Bush and the Republican Party on the basis of retrospective evaluation. In the short term, the difference may be immaterial (a Democrat should win), but it might matter a lot later. Sadly (in my opinion) there just is not systematic evidence that Americans have become more liberal on tax, regulatory (except maybe envoronmental), or fiscal policy.

Posted by hw | March 27, 2008 6:18 PM

fraud flourished before the 1990s.

Of course it did. Fraud is a universal when you've got financial transactions.

Keeping a lit on fraud is like collecting the trash; there's always going to be more work to do, but it you don't do it, the streets fill up with filth and vermin.

No one was minding the coop. "Fraud flourished before the 1990s. Yeah, no kidding; that's the point.

Posted by joe | March 27, 2008 7:05 PM

fraud flourished before the 1990s.

Of course it did. Fraud is a universal when you've got financial transactions.

Keeping a lit on fraud is like collecting the trash; there's always going to be more work to do, but it you don't do it, the streets fill up with filth and vermin.

No one was minding the coop. Fraud flourished before the 1990s. Yeah, no kidding; that's the point.

Posted by joe | March 27, 2008 7:06 PM

Since a couple of commenters appropriately took care of responding to Howard on his "stuff", I will leave it at that. What I do find interesting is that there are several commenters because they cannot grasps the level of Obama's intellect, just give up and refute his insights, basically due to their own lack of knowledge. Which is actually okay because after the past 16 years we do finally have an opportunity to have a President that is smarter than we are and that is refreshing.

Posted by Dee | March 27, 2008 7:14 PM

The difference between Obama's proposals and Clinton's is that Obama would not need the Congress to pass much of what he proposed. When it comes to regulations, the president has a wide lattitude in setting forth policies. The president can't make new regulations but under existing rules and regulations, he can shift the focus and application of old ones while pushing for new regulations.

Posted by Retnep | March 27, 2008 9:12 PM

John Gapper had a good column on regulation in today's FT, "It is time for reflection, not regulation on banking". A couple of excerpts:

Take a deep breath, everyone. The last time that right-thinking Americans agreed on the need for more regulation as rapidly as possible, we got Section 404 of the Sarbanes-Oxley Act. Accounting firms were given a vague and onerous mandate and, the next thing anyone knew, New York was losing its financial strength to London.

So what should be done and, just as importantly, what should not?

First, proceed slowly. The damage from this crisis is done and it cannot be undone in retrospect. As Hal Scott, a Harvard finance professor, puts it: “There will be huge consequences for our economy from regulatory change and one lesson from Sarbanes-Oxley was not to rush.”

[...]

What politicians should not do is rewrite banking and securities regulation to reinstate Glass-Steagall or to attempt to stop investment banks using securitisation, derivatives or investment vehicles – the things that, piled on top of each other, have caused mass disarray.

Financial technology cannot be put back in a box any more than information technology. This is the culmination of 30 years of innovation starting with the Black-Scholes option pricing model in 1973 but the notion that we can return to 1972, with credit held on bank balance sheets and investment banks just flogging securities on commission, is otiose.

All that would happen if Congress tried that would be a giant version of Sarbanes-Oxley. The global investment banking industry, which is dominated by US institutions, would be driven offshore to London or Zurich. It would find some jurisdiction where it could continue to operate in peace.

Instead of lots of new regulations, we need better incentives. Banks made too many subprime and junk loans and over-leveraged the financial system, because they did not believe they would suffer if the borrowers defaulted (although, as it turns out, they were wrong about that).

In future, they need to have reasons to fear losses as much as they covet profits. Here are two suggestions for ways to alter incentives:

First, regulators could insist on banks keeping a slice of the risk in any debt securities they sell from mortgage-backed bonds to leveraged loans. Insurers who sell catastrophe bonds to offset risk retain a slice of the exposure to stop them paying out insurance claims heedlessly when others are picking up the bill.

Second, investment banks could have a version of the Federal Deposit Insurance Corporation, which collects premiums from US banks to cover the cost of bail-outs. The FDIC premiums are set according to the riskiness of the individual institutions – banks with strong capital and low-risk operations pay less into the pool than those that are less stable.

Why not make investment banks pay a risk-related premium so that, in any future case of a Bear-style bail-out, the industry collectively foots the bill rather than the taxpayer? That would not only be preferable in terms of public interest, but would give individual investment banks incentives to operate cautiously.

Posted by Fred | March 27, 2008 10:36 PM

Let's remember that in the four presidential elections from 1992 onwards the Democratic party has won two handily, won the popular vote in a third, and came very close in the fourth. In the fifth election since 1992 the Democrats have at least an even shot at winning. Let's compare that to the 6 presidential election before 1992 (and after LBJ's landslide in 1964). The Democrats lost five of those six, and lost three of them were in landslides.

My point? Since Bill Clinton the Democrats have been competitive in presidential elections, and before him they weren't for a generation. And now that the Democrats are back in control of Congress and seem poised to tighten their grip this year, we now though the price was 12 years of Republicans in Congress. But if you take presidential elections, governorships and Congress, the Democrats seem in better shape decade after Bill Clinton on the whole then they did ten years before him.

Posted by Tim K | March 27, 2008 11:13 PM

Sure.

If you forget that Congress exists, or what Newt did to it.

(Me, I rather liked this speech, and it's going to play well against McCain's ludicrously poor plan in the general.)

Posted by Demosthenes | March 27, 2008 11:33 PM

Tim K - You give Bill Clinton credit for making the Democrats competitive in Presidential elections, but there's an alternate theory: Democrats became competitive for the Presidency when the Cold War ended. Until then Republicans had a huge advantage as the party most trusted for national security and anti-Communism.

Likewise, Bill Clinton is credited for a great economy during the dot com boom, but there was a whole new industry at work that he had nothing to do with creating. (As opposed to Al Gore, who actually did push for internet funding....)

I give Bill Clinton credit for managing a good economy fairly well, and for winning a difficult Presidential election. I think he did well, and that he was fortunate in factors beyond his control.

Unfortunately, his wife is not building the Democratic Party this year. A charismatic young Senator from Illinois is.

Posted by Rachel Q | March 27, 2008 11:45 PM

This was a remarkably cogent and on-point speech. I am a long-time Wall Street professional, and couldn't find much to disagree with. (For your readers who aren't familiar with the culture of Wall Street, there's a significant presence, although not a majority, or liberals and democrats.) The basic point was that what got us into the current mess was a regulatory structure that hadn't evolved in line with changes in the financial architecture is almost a commonplace. In fact, it has been widely accepted on the Street for some time that the existing regulatory structure hadn't caught up with the diminished importance of banks as financial intermediaries and the increasing complexity of securitization. (There are, after all, claims known as "CDO-cubes" which are, depending on how you count, either three of four levels of derivative removal from the performance of the underlying debt obligation.) What I've long believed, as a lesson from history, that the political will for effective regulation would never arrive absent a serious meltdown. (Name me an effective and important preemptive regulation.) When there's money to be made in the short run, a blocking coalition can always defeat new regulation. Obama's juxtaposition of short run gain as the enemy of long run prosperity is right on target.

Of course, he has good economic advisors, and I know a few of them. But advisors are just advisors. Most of all, I'm impressed with just how smart this guy is.

Posted by Matt | March 28, 2008 12:13 AM

Rachel Q:

Right, Bill Clinton deserves no credit because there were so many factors at work, but Barack Obama is building the Democratic party before he's even done anything meaningful, and he's just about a living prophet. Try being a little bit more consistent.

Posted by Tim K | March 28, 2008 12:17 AM

As a fellow Wall Street professional, I have long been worried about the complex securities that have been flowing around in the last 12 years.

Things have gotten out of control and regulators don't even know how to keep a lid on it. The financial derivatives floating around are so complex, you hardly understand it.

Banks balance sheet are full of so many complex derivatives, in fact i have made it a point of duty not own any of the financial stocks. Manipulation seems to be the order of the day on Wall Street.

Obama seems to be the only candidate that gets it. His speech was right on the money and please he gave it in New York. We need 21st century regulation that will force big players to be more transparent.

Posted by Gbenga | March 28, 2008 12:43 AM

"Since Bill Clinton the Democrats have been competitive in presidential elections"

Even though many believe Al Gore didn't run away from him fast enough.

Posted by 55 | March 28, 2008 1:02 AM

55:

Yeah running away from the longest post-war economic expansion is a very sound political strategy. Al Gore has to take some responsibility for his own failure, it cannot be pinned on Bill Clinton. The real credit is owed to people like Ken Starr, Al D'Amato, David Brock, The Arkansas Project, and the "Right-wing Attack Machine", also known as the Vast Right-wing Conspiracy. They succeeded in severely damaging the reputation of President Clinton and Senator Clinton to the point where even people come on this blog and call themselves Democrats believe it. I see people here talking about White Water, talking about Genifer Flowers, troopers, Paula Jones, travel office, Vince Foster, cattle futures... the most ridiculous trumped up charges... and even some Democrats believe it.

The irony is the present day beneficiary is a guy named Barack Obama. Right-wing lies are the reason Hillary Clinton has these high negatives, because she was subject to a decades long campaign of hate and disinformation in order to accuse her of everything from fraud to murder. And now Barack Obama reaps the rewards and calls her "divisive."
Well the question thinking Democrats should be asking themselves is how did she and her husband make so many enemies among the right-wing and attract an effort to destroy them personally and politically? Is it because they were really Republicans in sheeps clothing? Or was it, rather, because they finally beat the Republicans in a presidential election and had to be ended. Just ended as public people.

Susan McDougal didn't spend two years in a federal prison so Democrats like Barack Obama could accuse the Clintons for being divisive.

Posted by Tim K | March 28, 2008 1:16 AM

Tim K - Obama has had some significant accomplishments in his life, legislative and otherwise, however early he may be running for President. He's the one building the Democratic Party right now. You don't need to worry about prophet status to see this.

Posted by Rachel Q | March 28, 2008 3:34 AM