June 27, 2010
In spite of calls to break up banks from the left, the bill drafted by Senator Christopher Dodd and Congressman Barney Frank of Connecticut and Massachusetts respectively actually does not end "too big to fail." Banks are restricted in proprietary trading activities and forced to renounce their swaps desks to become separately capitalized operations but the largest part of their derivatives business is left untouched: between 80 and 90 percent of those activities are expected to remain within the banks and the five largest of them---Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley---control over 95 percent of that market, or close to $200 trillion.
In spite of all the rhetoric and the legislative witch hunt which lawmakers persued after they themselves agreed to bail out banks deemed so vital to the US economy that the very notion of their collapse might trigger a panic, they are now set to make those very Wall Street firms wrongly blamed for causing the crisis stronger by imposing capital charges that will make it more difficult for new banks to enter the playing field. In the words of one former Treasury Department official quoted by Newsweek, "they've created six new GSEs," or government-sponsored entities like Fannie Mae and Freddie Mac, also counting Wells Fargo.
Yet those institutions, which were instrumental to inflating the housing bubble, driving down interest rates and played a key role in the Bush Administration's "compassionate conservative" policy of promoting homeownership, are wholy absent from this new legislation.
The reform bill would erect a new consumer protection regulator within the Federal Reserve---an arrangement Congressman Franke previously described as a "bad joke" but now, apparently, can live with. The agency would be authorized to regulate mortgages, credit card policies and consumer loans with a budget of its own, separate from the Congressional appropriations process.
Government will be granted additional powers to regulate Wall Street and break up failing corporations. In order to pay for the new programs, Washington will be allowed to charge fees to large banks and hedge funds to raise up to $19 billion spread over five years. All "large" banks are effectively expected to bear the burden of a fund that is designed to help out one of more of their competitors in the event of a near bankruptcy. If the money hasn't to be used for that purpose, lawmakers are suggesting that it can pay down part of the national debt.
Democrats have hailed the legislation as a step toward preventing the sort of financial collapse witnessed two years ago. President Obama has urged Congress to deliver the bill for his signature without delay. Republicans almost unanimously oppose it. They warn of unintended consequences and fear that it might crimp financial markets and access to credit.
Originally published at the Atlantic Sentinel, June 27, 2010.
June 16, 2010
One and a half year into to the Obama Presidency, it seems evident that this administration's economic policy is guided by a deep seated mistrust of private business. Whenever an economic problem arises, it is capitalism that takes the blame. Whenever a social questions begs action, it is Big Government that is prescribed. Health care, financial reform and BP's oil spill in the Gulf of Mexico are three recent examples of how the Obama Administration has chosen to deal with the supposed shortcomings of the free market.
Still on the campaign trail, then Senator Obama lambasted insurance companies for failing to provide adequate, affordable health care to all Americans. The medical insurance business, he complained, was “driven from a business mentality instead of a mentality of, how do we make patients better?” He even suggested later that greedy doctors needlessly cut out children’s tonsils! The rights and opinions of doctors and nurses were obviously completely forgotten in the health care debate; good for the administration, for an overwhelming majority of them opposed reform.
While crusading for passage of his health care bill, the president reiterated time and again that private insurers had had their chance and failed while constantly finding news ways to blame them for what were really the faults of excessive government interference. He quoted the tens of millions of Americans currently uninsured, conveniently neglecting to mention that under the Democrats’ overhaul, just a few more million would get insurance, albeit against massive costs and necessitating a bureaucratic experiment quite unprecedented in the American experience. Private insurers, said Obama, were solely concerned with profit making. Government, instead, would truly care. Two months after ObamaCare was enacted, Americans found out once and for all just what government health care really means: rationing.
It seemed no one bothered to ask why America’s health care was broken. No one bothered to consider, it seemed, that for decades, government has already been involved, through Medicare and Medicaid, mandates and price controls and employer-based insurance schemes incentivized and regulated by state and federal law. With no free market and an entitlement mentality slowly taking the better of the American people, no wonder health insurance costs skyrocketed.
Rather than considering this, the administration circumvented states’ rights and assaulted individual liberties by demanding that all Americans carry insurance and by forcing all medical insurers and professionals to go along with this program in its noble effort to deny a few more million Americans the responsibility of caring for their own health.
When the price of ObamaCare turned out to be higher than expected---as a few congressman, like Paul Ryan, had predicted---Democrats would not back down. Rather, they ridiculed those companies who dared question their judgement and threatened to hail them in for congressional hearings. As The Wall Street Journal put it at the time, “Democrats don’t like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.”
Intimidation has become this administration’s natural response when its anti-business rhetoric and measures don’t seem to pay off. The president’s reaction to the BP oil spill in the Gulf of Mexico has unsurprisingly been an exceedingly aggressive one. He stressed, many times, that the oil giant would be held accountable for the accident, as though anyone were pretending otherwise, and wondered out loud “whose ass to kick.” So fervent has the president’s rhetoric been that companies in the United Kingdom are worrying about a possible backlash against British business in general.
Some offhand remarks made by the president in the wake of the crisis have been revealing as to his state of mind. In an interview with NBC broadcast on June 8, Obama not only suggested that BP Chief Executive Tony Hayward should be fired; he noted that he hadn’t actually spoken with Hayward because, as he put it, “when you talk to a guy like a BP CEO, he’s gonna say all the things right to me.” The president said that wasn’t interested in words. “I’m interested in actions.”
Evidently, Obama hadn’t spotted Hayward extensively touring the Gulf area in recent weeks to do exactly that: take action. The only times Hayward was seen talking exhaustively was when Congress demanded his presence on Capitol Hill to testify about the accident and its necessary cleanup.
What’s more troubling though is just how easily Obama dismissed BP’s CEO as “one of those kind of people.” Such choice of words was similarly employed while the administration attempted to enact financial reform earlier this year. Wall Street bankers were not only blamed for leading the world into economic turmoil; they awarded themselves “excessive” bonuses for directing their companies to operate, as one Democratic congresswoman put it, like “casinos”.
Except for a very few Republican legislators, no one on Capitol Hill bothered to wonder whether series of government interventions in the American housing market might not have played a role besides supposedly erratic risk taking on the part of a few large private banks. Similarly, no one seemed willing to ask whether bailing out these banks---and later, automakers---was part of their job description. The president was one of the few to state that it wasn’t, as much as he had previously described the move as “necessary.” In an interview that aired on CBS on December 12, Obama bluntly attested that he “did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” He went on to suggest that after driving the US economy to the brink of collapse, these same fat cats were handing out multibillion dollar bonuses and actually profiting from the downturn. Most congressmen and senators played it safe and equally blamed business where they should have looked at their own records. Just as a few lawmaker began to dissent and question the consensus, the Gulf oil spill happened. It couldn’t have come at a better time.
President Obama knows it. In an interview with Politico conducted early in June, he professed that Republicans would undoubtedly have blocked efforts to curb the influence of Big Oil if he had tried. “If six months ago, before this spill had happened, I had gone up to Congress and I had said we need to crack down a lot harder on oil companies and we need to spend more money on technology to respond in case of a catastrophic spill, there are folks up there, who will not be named, who would have said this is classic, big government overregulation and wasteful spending.” And they would have been right. Already, oil companies are subject to extensive oversight and regulation, deepwater drilling in particular, and it didn’t stop an accident from occurring. No amount of legislation ever can.
That’s not the president’s point. What he is saying is that he, and he alone, knew that these people could not be trusted. The fact that just a month before the Deepwater Horizon accident took place, Obama proposed to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the northern coast of Alaska to oil and natural gas drilling is something that is once again conveniently missing from the narrative. It shouldn’t be. These regions, along with the states of Colorado and Wyoming, combined hold over two hundred billion barrels of oil and two thousand trillion cubic feet of natural gas that are recoverable with today’s technology. That’s more than most OPEC nations. If fully developed, it would be enough to free America from the import of foreign oil for almost fifty years. Yet, according to the president, “drilling alone cannot come close to meeting our long term energy needs.” Is it really long term vision that’s keeping the administration from exploiting the country’s vast oil and natural gas reserves though? Or is it just that it’s now politically inconvenient to admit that America is addicted to oil and that, for several decades at least, there are no alternative fuels available to take its place?
According to Obama, he’s not the one that’s being hypocritical. In the same Politico interview, he blamed Republicans and Tea Party protestors for all the sudden demanding that government “do something”---the same people who, in the president’s words, “just two or three months ago, were suggesting that government needs to stop doing so much.”
Has the president perhaps forgotten that two weeks after the accident, he stood in front of a crowd in Venice, Louisiana and proposed to do just that---something. Indeed, another few weeks later, on May 27, during a press conference about the incident, Obama insisted that his administration, not BP, was taking responsibility for cleaning up the spill. “It is my job to make sure that everything is done to shut this down,” he declared then. Little wonder, people are expecting him to make true on his promise.
Undoubtedly, the White House is doing everything within its power to expedite the cleanup effort. Rather than letting the mess speak for itself though---which surely, should suffice to convince any sceptic that corporations sometimes do terrible things---the administration is capitalizing on the incident to forward its anti-business agenda.
Most recently, on June 15, in a televised address to the nation, Obama blamed not human failure but regulatory failure for the oil spill. The Minerals Management Service (MMS), which is responsible for regulating deepwater drilling and issuing permits, "has become emblematic," said Obama, "of a failed philosophy that views all regulation with hostility---a philosophy that says corporations should be allowed to play by their own rules and police themselves." That was not really what went wrong at the MMS however. What went wrong, and this he also knew, was that "oil companies showered regulators with gifts and favors," resulting in favoritism or crony capitalism. That is what happens when companies are subject to excessive regulation and see a chance to bribe officials to enjoy a little more freedom of enterprise. They typically lose sight of the common sense necessity of policing themselves because government has taken over that responsibility. The mistake which companies make under those circumstances is not that they view regulation and oversight with hostility; rather, their mistake is to rely on it too much.
According to the president, "one of the lessons we've learned from this spill is that we need better regulations, better safety standards, and better enforcement"---though all existing regulations and safety standards and enforcement mechanisms obviously couldn't prevent a catastrophe from occurring. Indeed, to quote from the president's Oval Office speech once more, "no matter how much we improve our regulation of the industry, drilling for oil these days entails greater risk." Then what reason is there to assume that more regulation will accomplish anything?
Obama began by portraying Republicans as the “Party of No” when they objected to his health care bill. He went on to characterize them as “Wall Street’s allies” when they questioned his financial reform effort. Other leading Democrats were even more aggressive. Speaker of the House Nancy Pelosi in late April complained that banks had imperilled the financial future of many ordinary Americans---“for their own personal gain.” She suggested that lawmakers had to decide whether they were “with America’s families or with the credit card companies and the banks.” Yet not even those words managed to destroy the opposition. In many states, Democrats are still set to lose seats in this fall’s midterm elections.
So now the oil spill is a chance for Democrats to prove once and for all that business is bad and Big Government a godsend. Meanwhile, a year after the president promised to cut billions in wasteful government spending, the deficit is expected to be more than a trillion dollars this year, the national debt is mounting, hovering near 90 percent of GDP, and little effort appears to have been made on actually bringing spending under control. Rest assured though, according to this administration, regulated markets work best and once it taxes just a little bit more and legislate just a little better, all fraud and inefficiency inevitably plaguing government programs won’t matter. After all, it’s business that’s destroying America. Government is trying to make everyone’s lives better instead. No?
We’ll know this November whether the American people agree.
Originally published at the Atlantic Sentinel, June 16, 2010.