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Robert L. Borosage

Robert L. Borosage

Posted: March 25, 2008 07:09 PM

Who Gets Us Out of the Mess?


Are the folks who led us into the mess the best ones to lead us out? Yesterday in a speech on credit crisis, Hillary Clinton called for the president to appoint an "Emergency Working Group on Foreclosures," led by "a distinguished non-partisan group of economic leaders like Alan Greenspan, Robert Rubin, Paul Volcker." (emphasis added) This "proactive step," she argued, would "help re-establish confidence in our economy." The group's first order of business would be to assess whether and how the government should "buy, restructure and resell underwater mortgages."

Alan Greenspan, former head of the Federal Reserve, is the official most directly responsible for the current crisis. He not only failed to demand and enforce regulation of the shadow banking system at the heart of the credit collapse, but he served as cheerleader in chief for both the housing bubble and the exotic financial innovations that turned the staid home mortgage market into a speculative casino. Bob Rubin, Secretary of the Treasury under Clinton, made financial deregulation his signature, including repeal of the Depression Era Glass-Steagall Act designed to limit the conflicts of interest at the heart of the current debacle. As chief strategist of Citibank, he presumably helped lead that bank into billions of losses in mortgage backed securities. He would have a direct financial interest in the terms of any federal refinancing of home mortgages.

Greenspan and Rubin were once hailed as the Committee to Save the World. Are we now to engage them to save us from the world they helped create?

Hillary isn't alone. John McCain admitted that "The issue of economics is not something I've understood as well as I should." But he said, "I've got Greenspan's book." The Obama's campaign response to Hillary's proposal was to say that he had suggested a similar group last fall, although his economic advisor did caution against having people on the committee with a stake in the outcome. As the charts below show, banks and investment houses are by far the leading contributors to both the Obama and Clinton campaigns (not surprisingly, since that's who's been making most of the money in the past decade).

This is no small matter. We are headed to a taxpayer funded intervention into the housing-credit debacle. The Federal Reserve has already committed hundreds of billions to support the squirrely securities of unregulated investment houses. If the crisis continues to get worse -- which seems likely -- Congress will be forced to step in to try to avoid a deep and long recession or worse. Already Senator Chris Dodd and Representative Barney Frank are developing plans for a federal agency to buy up the mortgages of homes that are "under water" -- worth less than the mortgage. This would get the bad paper off the balance sheets of the banks and investment houses, and refinance homeowners at a lower price. Hundreds of billions will be at stake in the terms of those deals -- how much loss the banks and investment houses are forced to absorb, how low the new price of the house is set, how much the government will risk. As Bob Rubin has stated, any bailout should include regulation of the unregulated shadow banking sector, with strict requirements on capital reserves to limit leveraging and gambling with other people's money. Any bailout should also begin to regulate bankers' remuneration, to curb the multi-million dollar personal incentives they now have to make riskier and riskier bets. To get this right, an administration will need leaders knowledgeable enough to negotiate these rapids, but independent enough to protect the public interest.

That won't be easy in any case, but the folks who helped dig the hole we are in aren't likely to be the best in getting us out of it.

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