Thursday, March 27, 2008
Bainbridge nails it on Obama's "financial markets" speech today
Having been alerted by the MSM that Barack Obama planned a major speech from New York City today on the financial markets and his would-be Administration's plans to deal with them, I hunkered down to watch the speech with a vague thought of writing a blog post about it. I can understand why after a few minutes, the main CNN and Fox News channels cut away: there are supermodels to obsess over, after all, and car chases, and all of the other crap they use to fill 90% of their daytime broadcasting hours. To my dismay, however, not even the cable/satellite financial channels carried the whole speech. Here we have the likely nominee of the Democratic Party, who most odds-makers still peg as the likely next POTUS, announcing how he plans to address the nation's economic problems (which all of the news channels have been obsessing about, continually and hysterically if only intermittently, for months) — and none of those hundreds of channels can spare him 30 uninterrupted minutes? Sheesh, if a financial news channel can't cover that, what damned good is it?
My confident guess is that the Obama campaign's economic advisers collaborated for several weeks on this bundle of observations, criticisms, and campaign promises. But TelePrompter or not, the candidate did it due credit with his delivery, and he seemed as sincere as I've ever seen him (which could lead me into the proverbial whole nuther post, but I'll save that for another day).
Anyway, it turns out that UCLA Law Prof. Stephen Bainbridge has already written the post I wish I had, and he's done so from a position of better authority and with more erudition than I would have managed. His post is entitled "Parsing Obama’s Financial Regulation Speech," and it's exactly that — a very, very careful and detailed reading and analysis of what was, indeed, a remarkably detailed political speech. I highly recommend it — but it's too rich to meaningfully excerpt here at much length, so my recommendation is that you follow the link and read the whole thing.
I will amplify, however, on one of Prof. B's observations that I think is hugely important for voters who are concerned about the biggest of big economic pictures:
Obama also posits that:
We must develop and rigorously manage liquidity risk.
We who? Some Washington bureaucrat? Enormous amounts of real wealth have been created by innovative financial instruments and transactions. Inevitably, those transactions pose some degree of liquidity risk. Are we to cut financial entrepreneurs off at the knees?
That's just one sentence that Prof. B plucked out, but it's a prescription that Obama repeated over and over in the speech (e.g., his insistence that "at the very least, these new regulations should include liquidity and capital requirements").
That is an incredibly arrogant statement, one that completely undercuts the rote lip service to free market principles at the beginning of the speech. You can only make a case for substantive government regulation of liquidity and capital — risk and leverage — if you believe that the proposed regulators are consistently smarter than the market itself. The problem is, friends and neighbors, that no regulator is that smart, or even remotely close to it. And every time that government regulators take power upon themselves, via substantive regulation, in the conviction that they will show themselves to be smarter than the market, they inevitably screw things up worse. That is the transcendent economic lesson of the Twentieth Century, upon whose ash-heap rest the state-planned and -controlled economies of the Communists and Socialists, most prominent among them the U.S.S.R.'s.
I'm not saying Barack Obama is a wild-eyed Marxist. But he definitely shares their same basic conviction — the conviction that "I'm the smartest guy here, and I can fix all of this if you'll just give me the power." (A goody-basket of financial treats and preferences is then immediately promised in order to persuade the electorate to give him the power.) As with the rest of Barack Obama's plans and platform, when you peel away the attractive messenger and articulate delivery, the underlying policy today showed itself to be sadly typical of hard-left Democratic politicians for the last seven-plus decades: pro-regulation, anti-free market, and arrogant as hell in their certainty that they (and they alone) can "fix" your problems if you'll just put your trust, your life, your vote, and (via your vote) your wallet into their hands.
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Great post and many thanks for your kind words!
(2) Scott made the following comment | Mar 28, 2008 1:49:22 AM | Permalink
As I have long said, the Market is smarter than all of us, it will fix itself. It might suck, it might be rough as hell for everyone, but it will fix itself.
(3) Gregory Koster made the following comment | Mar 28, 2008 2:53:39 AM | Permalink
Dear Mr. Dyer: Professor Bainbridge has his own log in his own eye that sometimes takes him astray. Exempli gratia:
"Speaking of Sarbanes-Oxley, Obama really went off the rails when he described Enron and Worldcom as being the product of “industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment,” without once acknowledging the debacle that was—and still is—the Sarbanes-Oxley Act. I presume this is a deliberate omission, as acknowledging the point would remind his more thoughtful listeners that regulatory medicine is often worse for the patient than the economic bug."
Pardon me? Enron and WorldComm happened BEFORE Sar-Box. Why on earth should Obama talk about the genuine problems Sar-Box has caused when he wants to make the even more valid point about the toxic mixture of imbecility and dishonesty that Enron and WorldCom were? Has Professor Bainbridge not heard of Bear Stearns's blowing up? Would he care to make book that Bear will be the ONLY big financial firm requiring a bailout? Obama is making a political speech, and not one aimed at winning converts from Wall Street. With the economy looking gloomier by the day (I'll offer you 5 to 1 odds that when the second quarter data are released in August or thereabouts, you will have a recession, as it is defined) Wall Street is in no position to sneer. It is in for a good beating from the government, no matter who wins. The left will be satisfied, even as the rest of us groan. You are right to be worried about Obama's speech. He has never had to work out a big cris, with all eyes on him, and plenty of wiseacres in the galleries with rotten eggs at the ready. It shows in his speechifying. Things look so simple. It's tempting to whip out the pad and write the prescription, and then take the bows and applause of the mob. Bah. Jimmy Carter could teach Obama a thing or two about being walloped by crises. I would hope he gives Obama a fatherly talk. Doing so might depress both of them so much that they would shove off for bliss eternal, thereby pleasing everybody but God who would have to deal with these two...
Another difficulty I have with Professor Bainbridge is that he doesn't believe in markets. He says he does, but his entire body of work ("Corporate Boards of Directors Are Supreme" is how I would possibly oversimplify it) points the other way. The wisdom of a small group of corporate directors is not so different from the wisdom of a small group of regulators. Enron's directors were as effective as the SEC was. Nor can he tell me what he means by "markets." One of the big things that got Enron in trouble was developing businesses that had "thin" markets, with few customers, but treating the revenues and expenses as if there were "deep" markets there. The collective wisdom of markets is impressive in the long and even the not-so-long runs. But there are limits to it. Don't believe me? How on earth did all those subprime loans get made? I hear a great deal of sniffing about the bad decisions that borrowers made. But in order for those decisions to be made, lenders had to make equally idiotic ones. How did they get away with it? By selling the loans fast. No long term relationships, so why worry? You'll always have a bigger fool who will buy your bad loans. This is a classic symptom of a bubble. Where was the wisdom of markets? There's the real point of attack for you and Bainbridge to make on Obama: the explosion of regulation doesn't work when the bubbles are forming. The Federal Reserve needed to step into the mortgage markets in 2005, with a big club, a mean as hell look on its face, growling that the party was over, open up the books, and the SEC and Justice Department have plenty of subpoenas and grand juries waiting...It didn't happen. No one ever wants a bubble to stop. "This time for SURE!" in the words of Bullwinkle J. Moose.
Summary: we better get McCain in, this November. But don't kid yourself. In his very different way, McCain will have his own idiotic schemes. If you think the GOP's chances are slim now, wait until the spring of 2012 with President McCain.
(4) Leon Dixon made the following comment | Mar 28, 2008 11:47:07 AM | Permalink
When Lucy has the football the taxpayers will bail out the banks. How many times are the working stiffs to bail out the smart folks? The list of bailouts is so long that market risk seems to be an outdated concept if you are "too big to fail". We have been in a bubble for a long time.
(5) Milhouse made the following comment | Apr 7, 2008 6:23:31 PM | Permalink
So Obama has contempt for the creators of wealth, and would like to make them pre-clear every move they make with the wise and disinterested regulators he would appoint. Unfortunately, this makes him no worse than McCain or Clinton, who both have exactly the same attitude. No matter what happens, the next president will be someone who simply does not believe in the freedom of enterprise; therefore that is not a valid basis on which to decide how to vote.
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