I have been waiting to hear what the presidential candidates have to say about how to address the financial crisis gripping the country, and the international markets. Very little of substance has been said, beyond vague pronouncements -- until yesterday. Sen. Hillary Clinton released a plan, which, in my humble opinion, underscores why another Clinton administration would do very little to get control over the fundamental problems in our financial system -- because she proposes putting people in charge of the reform who caused the very crisis we are in.
Under a bullet point entitled "A High-Level Emergency Working Group on Foreclosures to Investigate How to Achieve Broad Restructuring of At-Risk Mortgages," Sen. Clinton calls on:
...President Bush to appoint an Emergency Working Group on Foreclosures to address this question within the next three weeks. The group could be headed by eminent leaders like Alan Greenspan, Paul Volcker, and Bob Rubin - each of whom supports one of the remaining candidates in the Presidential race.[the added emphasis is mine]
I read this several times in astonishment, though it is not entirely frankly surprising. My own view, shared by many other people a whole lot smarter and knowledgeable, is that the financial meltdown we are witnessing -- a meltdown whose casualties will be millions of regular people, including 10 million people who will be living in homes whose values have sunk below what they paid -- is the culmination of several decades of a policy of de-regulation that was pursued by Democratic and Republican administrations, and encouraged, to one extent or another, by Messrs. Volcker, Greenspan and Rubin. These folks are "eminent leaders" only because they have been anointed as such by the political elites who either gave them the jobs they coveted, or leaned on them for cover (read: Bob Rubin as the Clinton Administration's emissary to the bond markets), or paved the way for political contributions -- or all of the above.
They didn't all make the same errors -- but the policies that they encouraged favored the financial elites over regular Americans. Those policies can be broken down into three points:
1. A belief that fighting inflation, above all, was the most important policy objective of the government and, by extension, the Federal Reserve.
2. Budget deficits are bad.
3. Deregulation is good.
A Google search makes this pretty easy to document (you would think some mainstream reporters might point this out but that's a different story). Let me give you a taste.
Just three years ago, when people were scoffing at the warnings about an impending financial crisis, Paul Krugman wrote about Greenspan:
He's like a man who suggests leaving the barn door ajar, and then -- after the horse is gone -- delivers a lecture on the importance of keeping your animals properly locked up.
Regular readers know that I have never forgiven the Federal Reserve chairman for his role in creating today's budget deficit. In 2001 Mr. Greenspan, a stern fiscal taskmaster during the Clinton years, gave decisive support to the Bush administration's irresponsible tax cuts, urging Congress to reduce the federal government's revenue so that it wouldn't pay off its debt too quickly.
And...
And here's where Mr. Greenspan is still saying foolish things. In his closing remarks he suggested that "an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit." Translation, I think: the end of the housing bubble will automatically cure the trade deficit, too.
Sorry, but no. A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more competitive on world markets, leading to higher exports and lower imports.
So there's a rough ride ahead for the U.S. economy. And it's partly Mr. Greenspan's fault.
My colleague Mark Weisbrot pointed out that Greenspan was, if you were a regular Joe, a disaster:
The Fed actually brought on the last (1990-91) recession by raising interest rates to 10 percent in 1989. Although Mr. Greenspan began lowering them as the economy slowed, it turned out to be too little and too late.
Paul Volcker may be a dim memory to many people but he is no friend of the regular American. When Volcker, who has endorsed Sen. Obama, was appointed by Jimmy Carter, it was that Democratic president's signal to the financial world that he, Carter, would embrace the neo-liberal agenda. And Volcker, in my view, created the modern Federal Reserve Board philosophy.
Traditionally, the Fed had a dual role: price stability and full employment. FULL EMPLOYMENT? Yeah, isn't that a quaint thought that no one ever talks about now because our expectations are so low. In an admittedly gross overview, Volcker tossed out the idea of full employment and pursued one goal: price stability. He did that by jacking up interest rates as high as 18-20 percent and driving the price of the dollar up -- which destroyed manufacturing and cost hundreds of thousands of Americans good-paying jobs (by the way, as a digression: this was a harbinger of the recent economic policies we endured, until recently, when a very high dollar killed a lot more good-paying jobs -- benefiting Wal-Mart and other corporations with large operations in China but not doing much good for our underlying economy).
Volcker set out to -- and was wildly successful -- at breaking wage expectations. Think today -- what do average Americans really expect to see in wage hikes in an economy where "efficiency," "free trade," "free market" and "inflation" are much higher priorities than improving the wages of most people?
But, in some ways, Volcker's most enduring legacy is that he laid the groundwork for a Federal Reserve that is unaccountable to the American people. Volcker's predecessors saw themselves as accountable to Congress -- and the voters. Volcker changed that. He argued that "price stability" was paramount and, to attain that goal, the country needed a Federal Reserve Board that was autonomous and above politics -- which meant unaccountable to voters. So, today, the Fed has an out-sized role in managing the basic fundamentals of the economy, far more powerful than the Treasury and the Congress. I believe that is horrendous and must be changed.
As for Robert Rubin, a leader of Citigroup, why would we let him even touch the issue of mortgages? As
Dean Baker, the co-director of the Center for Economic and Policy Research, points out:
Citigroup provided the secondary market for many of these predatory mortgages with its creative financial engineering and structured investment vehicles.
And Rubin has been a lead Democratic champion of deregulation, the very policy that has created the mess we find ourselves in:
When he stepped down from his Treasury post this past summer, Rubin left unfinished a legislative effort to re-write the nation's banking laws. Misnamed "financial modernization" legislation was really a deregulatory initiative -- reminiscent of the S&L deregulation that led to a corporate crime spree, the collapse of the industry and the subsequent taxpayer bailout of epic proportions.
The centerpiece of the deregulatory bill, which different fragments of the finance industry have pushed for a decade and a half, is the repeal of the revered Glass-Steagall Act, which bars companies from owning banks and insurance companies or securities firms at the same time.
The genius of these "eminent leaders" is that, to a great extent, they don't care who is elected. They, and the people who they work with, will run economic policy -- either from the private sector or from the Beltway.
Let me suggest a different proposal. We do need an overhaul of the financial system. But rather than put the same people in charge who have created the mess, I'd suggest that we need a different constellation of thinkers. My own modest suggestions (and I invite other nominations):
Dean Baker: co-director of The Center Economic and Policy Research and one of the earliest and most frequent analysts who warned about the housing bubble.
Ron Blackwell: senior economist for the AFL-CIO.
Paul Krugman: columnist for the New York Times, who I don't think is quite right on trade yet but is excellent when it comes to the issue of the role of government regulation in the financial markets.
I'd have these three lead the commission and figure out who else to appoint.
Sen. Obama? What say you?