What should we do about Wall Street's speculators who, stoned on risk and greed, have triggered a financial crisis that Alan Greenspan calls the worst since the Great Depression. In back to back speeches, John McCain and Barack Obama laid out their remedies last week. The contrast could not be more stark. Obama prescribed a withdrawal program. McCain suggested slipping the risk addicts more drugs.
Of course, that's not how it was covered. The press largely fell for McCain's faux "straight talk" -- his pledge he would not "bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." (As is frequently the case, the straight talk had an asterisk. McCain meant no bail outs for big banks, unless they are deemed "too big to fail," like Bear Stearns. In fact, McCain actually supports the half trillion or so that the Federal Reserve and the Treasury have used to bail out the banks and investment houses. He just doesn't want help for homeowners).
What the press didn't focus on was the two clear reform ideas in McCain's speech. Since banks facing insolvency need more capital, McCain urged "removing regulatory, accounting and tax impediments to raising capital." In a collapse triggered by the unregulated shadow banking system, McCain recommends less regulation.
And since capital reserves are being wiped out by the collapsing markets for exotic mortgage backed securities and other instruments, McCain urged convening a meeting of accountants to review "mark to market" accounting requirements. With bankers frozen because they don't know the worth of what they are holding, much less what others are holding, McCain's solution is to help them hide their losses. That surely will inspire confidence.
This isn't straight talk. It is -- to put it mildly -- goofy.
In contrast, Obama called for putting the cop back on the beat. He stated the basic principle: if investment houses are too big to fail, they must be closely regulated -- with requirements for capital reserves, limits on leverage and "excessive complexity," and close review of balance sheets. He even opened, however gingerly, the question of the outsized bankers pay packages that reward them for taking greater and greater risks with other people's money:
There is something wrong when... senior managers don't understand the implications of the risks assumed by their own institutions. It's time to realign incentives and the compensation packages so that both high-level executives and employees better serve the interests of shareholders.
What should we do when the risk addicts of Wall Street threaten to bring down the house? Peddle them more drugs or call in the cops? The choice will be ours.