Tuesday, September 16, 2008

Obama's Strong and Smart Reply to McCain's Strong and Dumb Response to the Economic Crisis

by Norman Markowitz

Senator Obama responded to McCain's posturing with measured disbelief. "We know how we got into this mess," he told a political rally. McCain's "outrage" at Wall Street, Obama went on to say "would be more convincing if he weren't offering them more tax cuts." Most importantly, Obama said directly that "What we have seen in the last few days is nothing less than the final verdict on an economic philosophy which has completely failed."

Specifically, Obama proposed a series of reforms to move dramatically away from the deregulation of the last three decades, including significant strengthening of existing regulatory bodies, specifically moving against predatory trading practices and raising capital requirements so as to restrict speculation close various loopholes which have fueled the present crisis.

He didn't say specifically that the U.S. should immediately repeal the Gramm-Leach-- Bliley Act (1999) which Clinton signed. repealing the provisions of the 1935 Banking Act , which separated commercial from investment banking. This permitted large banks to begin to greatly expand their speculative activities in many dubious areas including mortgage loans. The big banks, after they achieved deregulation under Reagan, fought for repeal and finally achieved it with Clinton's acquiescence. They used the catch-22 argument that with deregulation,the distinctions between loans, securities and deposits were largely ended anyway and that this sort of regulation was undermining profits. Questions of "conflict of interest" were also of no importance since the banks were buying and selling and reselling capital products the way Wal-Mart buys and sells anything on its shelves. Capital itself was a consumer product.

The traditional argument, which attorney and later distinguished progressive Supreme Court Justice Louis Brandeis, made in his classic study, Other Peoples Money (1914) against the unregulated banking system playing fast and loose with depositors savings in order to make quick profits, which directly influenced the authors of the Wall Street and banking legislation of the New Deal, was seen as having no place in the age of the "Reagan revolution." Also, the contention that insured depository institutions (insured by the FDIC) should be legally prevented from speculative activity, both to protect their depositors and also the FDIC system and the taxpayers who money stands behind it, fell by the wayside. It should be remembered that the banks which fought for both deregulation and repeal of the separation provisions of the Banking Act of 1935 did not fight for "repeal" of its insurance provisions, the FDIC, which meant that they could speculate recklessly with other peoples money and be bailed out when they were collapsing by other people's money.

Obama did say (addressing the larger issue) that "we need to regulate institutions for what they do, not for what they are, "stating that the regulatory "guidelines" on subprime mortgages should be applied to "mortgage brokers and companies," a step in the right direction toward serious reregulation.

McCain who has accused Obama of engaging in vague rhetoric about change has on this and other issues engaged in theatrical posturing about fighting the forces of evil. Obama has a fist full of specific regulatory reforms which address the crisis. McCain has nothing but "outrage" and a call for a presidential Commission whose advisory findings would take months if not years to be completed.