Renewing the American Economy

I agree with the broad stokes in Sen. Barack Obama’s proposed changes in response to the credit crisis:

I do not believe the government should stand in the way of innovation or turn back the clock on an older era of regulation. But I do believe that government has a role to play in advancing our common prosperity, by providing stable macroeconomic and financial conditions for sustained growth, by demanding transparency and by ensuring fair competition in the marketplace. Our history should give us confidence that we don’t have to choose between an oppressive government-run economy and a chaotic, unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker. But we can only do so if we restore confidence in our markets, only if we rebuild trust between investors and lenders, and only if we renew that common interest between Wall Street and Main street that is the key to our long-term success. Now, as most experts agree, our economy is in a recession. To renew our economy and to ensure that we are not doomed to repeat a cycle of bubble and bust again and again and again, we need to address not only the immediate crisis in the housing market, we also need to create a 21st-century regulatory framework and we need to pursue a bold opportunity agenda for the American people.

but I’m not entirely convinced by some of the details. For example he’s pretty committed to the notion that only lenders can be speculators—he supports Chris Dodd’s proposals that indemnify borrowers somewhat against risk. I’d prefer a rather more restricted measure that concentrated on the health of institutions and aid to those genuinely in need of it. He also proposes regulatory reform which I think is probably appropriate:

Now, the nature of regulation should depend on the degree and extent of the Fed’s exposure. But, at the very least, these new regulations should include liquidity and capital requirements. Second, there needs to be general reform of the requirements to which all regulated financial institutions are subjected. Capital requirements should be strengthened, particularly for complex financial instruments like some of the mortgage securities that led to our current crisis. We must develop and rigorously manage liquidity risks. We must investigate ratings agencies and potential conflicts of interest with the people that they are rating. And transparency requirements must demand full disclosure by financial institutions to shareholders and counter parties.

and promises a return to fiscal sanity:

I believe in PAYGO. If I start a new program I will pay for it. If I intend to cut taxes for the middle class, then we’re going to close some of the tax loopholes for corporations and the wealthy that are not working for shared prosperity.


So we’re going to have fiscal discipline. I know that we’ll have to overcome our doubts and divisions and the determined opposition of powerful special interests before we can truly advance opportunity and prosperity for all Americans.

While I agree with that wholeheartedly I’ll believe it when I see it.

There’s one missing link which I just don’t have the knowledge or skills to puzzle out. Is it really possible to stabilize the system without some sort of controls over who can buy and sell some of these hideously complex financial instruments? I mean beyond capitalization requirements. Do the buyers really have the knowledge and expertise to give informed consent to the risks? Do the sellers understand the risks of what they’re selling? Perhaps someone better informed than I can comment but it seems to me that in the absence of knowledge of what in the dickens is being bought and sold there’s no ability to evaluate and mitigate risk.

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