President Obama's big speech on financial reform, delivered today at Cooper Union in Manhattan -- the full text is here -- is worth a careful look.
From the transcript:
"It's also good to be back in Lower Manhattan, a few blocks from Wall Street. (Laughter.)"
Not even Mr. Obama's handpicked audience thinks the president professed like to be near Wall Street is anything other than a laugh line.
"I believe in the power of the free market. I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings. That's part of what has made America what it is."
Good stuff. But how did we know the next word was going to be: "But."
"I'm here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector. "
Mr. Obama thinks, and says, that he knows better than the financial sector and its lobbyists what is in the best interest of the financial sector. Amazing.
More: "the bill being considered in the Senate would create what we did not have before, and that is a way to protect the financial system and the broader economy and American taxpayers in the event that a large financial firm begins to fail. If there's a Lehmans or an AIG, how can we respond in a way that doesn't force taxpayers to pick up the tab or, alternatively, could bring down the whole system."
This is a false choice. The taxpayers were "forced" to pick up the tab because Mr. Obama and the other senators voted for TARP. That was a choice. Lehman failed and was dealt with through the existing bankruptcy system. We're still here. It didn't "bring down the whole system."
"I've insisted that the financial industry, not taxpayers, shoulder the costs in the event that a large financial company should falter." Why should the companies that were prudent and didn't fail be forced to shoulder the costs of their failed competitors? Mr. Obama applies this to the financial industry. But he hasn't insisted that the cost of bailing out GM and Chrysler be borne entirely by the auto industry. Why the double standard? You might begin to get the idea that Mr. Obama had something against bankers.
"There's a legitimate debate taking place about how best to ensure taxpayers are held harmless in this process. And that's a legitimate debate, and I encourage that debate. But what's not legitimate is to suggest that somehow the legislation being proposed is going to encourage future taxpayer bailouts, as some have claimed. That makes for a good sound bite, but it's not factually accurate. It is not true. " Mr. Obama is the judge of what is a "legitimate debate" and what is not a legitimate debate. Who appointed him the judge of debate legitimacy? Mr. Obama's own Treasury secretary, Timothy Geithner, has warned that "a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses. In essence, a standing fund would be viewed as a form of insurance for those stakeholders." The superintendent of financial institutions in Canada, Julia Dixon, has also suggested alternatives that would be better than a bailout fund.
Mr. Obama touts that the bill "places some limits on the size of banks." But plenty of small banks have failed, too. Big banks may even be more durable than small banks. Canada's banks and Israel's banks are big and they did not fail.
Mr. Obama quotes Warren Buffett as describing "derivatives that were bought and sold with little oversight as 'financial weapons of mass destruction.'" But Mr. Buffett's Berkshire Hathaway and its affiliates use and trade in derivatives, as does Goldman Sachs, in which Mr. Buffett's Berkshire Hathaway made a $5 billion investment. Mr. Obama's description of Mr. Buffett's take on derivatives is not the whole story.
Next Mr. Obama touts the creation of a "a dedicated agency setting ground rules and looking out for ordinary people in our financial system, we will empower consumers." He doesn't mention that this agency would be housed within the Federal Reserve, which can barely manage its responsibilities to fight inflation and maintain full employment, let alone tackle a third responsibility such as consumer protection. Never mind that the Federal Reserve is self-funded and features an un-elected leadership, so that when the consumer protection agency fails, as it inevitably will, the politicians will be blame-free.
"These Wall Street reforms will give shareholders new power in the financial system. They will get what we call a say on pay, a voice with respect to the salaries and bonuses awarded to top executives." Britain's shareholders had a say on pay. It didn't prevent the failure of Northen Rock or Royal Bank of Scotland.
"And the SEC will have the authority to give shareholders more say in corporate elections, so that investors and pension holders have a stronger role in determining who manages the company in which they've placed their savings." Another handoff to unelected bureaucrats, this time at the SEC rather than at the Federal Reserve. They did so well with Madoff, why not give them the additional job of rewriting Amerian corporate governance? The "investors and pension holders" that Mr. Obama really has in mind are things like the New York and California state pension funds that have already been troubled by scandals and politicization. Shareholders have a role in corporations, as even good capitalists like Carl Icahn recognize. But using the proxy power to take control of companies away from management and directors and into the hands of radicals is straight out of the Saul Alinsky playbook.
"some of the salaries and bonuses that we've seen creates perverse incentives to take reckless risks that contributed to the crisis. It's what helped lead to a relentless focus on a company's next quarter, to the detriment of its next year or its next decade." If Mr. Obama is worried about excessive short term focus, why does he want to increase the long-term capital gains rate on carried interest for venture capitalists and private equity managers, which by definition applies to gains on holdings of more than a year?
"we've produced a proposal that by all accounts is a commonsense, reasonable, non-ideological approach." Not by this account it's not. Nor by that of this morning's Wall Street Journal editorial.
"I read a report recently that I think fairly illustrates this point. It's from Time Magazine. I'm going to quote: "Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed… would rivet upon their institutions what they considered a monstrous system… such a system, they felt, would not only rob them of their pride of profession but would reduce all U.S. banking to its lowest level." That appeared in Time Magazine in June of 1933. (Laughter and applause.) The system that caused so much consternation, so much concern was the Federal Deposit Insurance Corporation, also known as the FDIC, an institution that has successfully secured the deposits of generations of Americans."
In fact, it's not clear that the FDIC was such a great idea. Columbia professor Charles Calomiris argues that it actually contributes to bank failures. It was set up as a temporary measure to insure small deposits and, like so many government programs, became permanent and was gradually expanded to larger and larger sums. It means that banks no longer compete for depositors based on the strength of their balance sheets or the security of their deposits, so a depositor has no reason to care how highly leveraged a bank is. And it crowded out an emerging system of state deposit insurance that might have allowed for experimentation in the laboratory of the states. For more thoughts on deposit insurance, see here.
"ultimately, there is no dividing line between Main Street and Wall Street. We will rise or we will fall together as one nation." This is the strongest and most constructive line in the speech, with echoes of Lincoln's "a house divided against itself cannot stand." My guess is that this is intentional, because Mr. Obama gave the speech at Cooper Union, where Lincoln, who, like Mr. Obama, was a senator from Illinois, also gave a famous speech. It's also a point we have been making here.
Overall, the speech could have been worse, but the financial regulatory overhaul the speech is designed to pass could potentially create some real problems for the American economy. One could argue that we already have real problems under the existing system. But, as with the health care overhaul, the key is to make sure that the cure for the problem doesn't make things even worse.