What Happened to Regulatory Reform?
NEARLY two years ago, as a presidential candidate, Barack Obama gave a stirring speech at Cooper Union in New York about the need to reform the country's financial system. Joseph E. Stiglitz, the Nobel-winning economist, recalls it fondly in his powerful new book, "Freefall: America, Free Markets, and the Sinking of the World Economy" (Norton, $27.95).
But Mr. Stiglitz laments that the president failed to make good on such soaring rhetoric. He argues that Mr. Obama has continued for the most part to pursue the failed policies of George W. Bush. This, in the economist's view, has benefited Wall Street but has done little for ordinary citizens.
The results speak for themselves, Mr. Stiglitz says. He worries that "the best that can be said for the economy was that by the fall of 2009 it seems to be at the end of a freefall, a decline without an end in sight. But the end of freefall is not the same as a return to normalcy."
That raises a question: How is it that Mr. Obama the candidate understood the need for economic reform while Mr. Obama the president became a defender of the status quo in many unexpected ways?
Mr. Stiglitz, a former chief economist at the World Bank who spent time in the White House as an adviser to President Bill Clinton, thinks he knows the answer. He writes that Mr. Obama surrounded himself with an economic team whose members — Ben S. Bernanke, the Federal Reserve chairman; Timothy F. Geithner, the Treasury secretary; and Lawrence H. Summers, the director of the National Economic Council — have been reluctant to revamp the financial system.
Mr. Stiglitz says that these are some of the same people whose policies brought us the economic collapse of 2008. That is sure to rankle their supporters, but Mr. Stiglitz, a fine writer, makes a persuasive case.
He says that after Mr. Bernanke replaced Alan Greenspan in 2006, he had a chance to prick the credit bubble. Instead, as we all know, Mr. Bernanke continued the low-interest-rate policies of his predecessor. The results haven't been pretty.
Mr. Stiglitz writes that Mr. Geithner didn't rein in the financial industry's risky practices in his previous job, as chairman of the New York Fed. Yes, Mr. Geithner gave speeches warning of potential dangers, but he "was meant to be a regulator, not a preacher," Mr. Stiglitz says.
The author is especially critical of Mr. Summers, his former colleague in the Clinton White House, who helped thwart an attempt to regulate derivatives in the waning days of Mr. Clinton's second term. The same financial instruments, of course, played a devastating role in the recent crisis.
Perhaps it's not surprising, then, that the Obama team didn't take bold action on the economy right away, Mr. Stiglitz says. Instead, he writes, it doled out more bailout cash to banks and floated bad ideas. These included the Public Private Partnership Investment Program, which the author complains would have enabled "certain members of the Wall Street club" to buy toxic mortgages from ailing banks at inflated prices. Who would be burned if these deals went bad? The taxpayer, of course.
This was such a sweet deal that private investors shied away from it: "They worried that if they made too much money, the bureaucrats and the public wouldn't let them get away with it and would find some way of recouping the profits," Mr. Stiglitz says.
In his opinion, the White House tried to "muddle through" the crisis in the hope that the markets would improve and the public would eventually start spending again.
Mr. Stiglitz argues that this was fine with Wall Street and that bankers were also stalling for time. "The strategy of players in the financial markets was clear: let the advocates for real change in the banking sector talk and talk; the crisis will be over before an agreement is reached — and with the end of the crisis, momentum for reform will disappear," he says.
Delays by the administration, Mr. Stiglitz believes, will almost certainly prolong the recession. But he says that it's not too late to fix the financial system. He offers a long list of proposals to tame the banking sector and to foster a more humanistic style of capitalism in the United States and abroad.
Mr. Stiglitz argues that so-called too-big-to-fail banks like Citigroup are exactly that: too big. He says that they should be broken up, and that the government should regulate derivatives and discourage mortgage securitization.
What's more, he says, Americans need to get over the idea that higher taxes and more government involvement in the economy are a recipe for disaster. He points to Sweden as an example of a country that has a thriving economy but still provides its citizens with extensive social services.
THESE may all be worthy ideas. But at times, Mr. Stiglitz's call for a new economic order seems a bit fanciful. Can you imagine President Obama going before the American people and telling them they need to emulate Sweden? Imagine the fun Glenn Beck would have with that.
The irony is that just as "Freefall" appeared on bookstore shelves, the Barack Obama who spoke so eloquently about the need for reform at Cooper Union reappeared. Earlier this month, he proposed a tax on banks to recover bailout funds from banks and new regulations forbidding them from running internal hedge funds with their depositors' money. And in his State of the Union address last week, he followed this up with proposals to help people whose lives have been upended by the crisis.
It seems that the president has decided he can't afford to protect the status quo. Mr. Stiglitz is unlikely to have all his wishes granted, but it appears that the White House agrees with one of his arguments.