September 16, 2008

He might not want to say it out loud, but Barack Obama senses, no doubt, that this past weekend’s financial meltdown will do much to boost his slumping electoral prospects. According to Democratic lore, financial woes make the “€œrich guy”€ Republicans look bad and send the reeling middle classes into the arms of the party of welfare and wealth redistribution. Wide-scale financial turmoil is the kind of political “€œopportunity”€ Paul Krugman is always talking about and which many liberal commentators think Obama is ready to seize.

In his first public statement, Obama recited the standard Party Line, blaming the whole thing on those callous Republicans who didn”€™t care enough about the working people and who didn”€™t tax enough all those greedy CEOs, whose huge bonuses were probably the source of all our troubles.

What’s most remarkable about this kind of “€œleft-wing populism”€ is that its implied policies are essentially indistinguishable from those of Hank Paulson“€”and thus all-too compatible with the “€œNew Class”€ managers of the Washington-New York corridor. Whatever his rhetoric, Obama would ultimately inject more taxpayer-funded capital into markets, prop up more of those semi-governmental financial institutions, and hand out more golden parachutes to the CEOs with connections and “€œpull.”€ Put simply, the Man of Change doesn”€™t threaten the status quo in the least.  

Freddie and Fannie spent more than $200 million on lobbying over the past decade, most of it going to Democrats, and they were “€œre-nationalized”€ with bipartisan support. Lehman Brother, which Paulson thankfully resisted bailing out, has accounted for almost $400,000 in donations to the Obama campaign. It’s thus likely that Obama would have been more assiduous in helping out his Wall Street buddies than Paulson and the Bush administration.  

At first glance, McCain might seem marginally more sensible. In his own public statement on the crisis, he said he didn”€™t want taxpayers to bail out Lehman, which is good. And it’s worth noting that two weeks ago, Sarah Palin claimed that Freddie and Fannie had gotten “€œtoo big and too expensive to the taxpayer,”€ again a very good sign.

But when McCain got down to brass tacks, as he likes to say, he seemed to argue that the situation can be righted with more efficient regulation.

Says Mac,

The McCain-Palin administration will replace the outdated and ineffective patchwork quilt of regulatory oversight in Washington and bring transparency and accountability to Wall Street.


I”€™m unable to make heads or tails of what this actually means, but it appears that McCain is stuck in the days of the Enron scandal and thinks that the current mess was created by a lack of transparent accounting, or something or other. Mac’s solution would thus be laws like Sarbanes Oxly, which are tedious and harmful to small business and which, in the end, simply give tax accountants more things to do.

No one wants to talk about what really caused the whole mess. 

In his recent column, “€œSpengler”€ argues that the collapse of Lehman marks the “€œend of leverage”€:

The income of American consumers might have stagnated, but the price of their houses doubled during 1998-2007 thanks to the application of leverage to mortgage finance. The profitability of American corporations might have slowed, but the application of leverage in the form of mergers and acquisitions financed with junk bonds multiplied the thin band of profitability.

Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets. Led by the financial engineers at Lehman, the securities industry grew an enormous infrastructure of staff, systems, and financial exposure. They were so successful that when the music stopped, there was no way to liquidate this mechanism gracefully. It only could be allowed to collapse.

This is all true, but it’s important to remember where all this excess capital came from. The “€œleverage bubble,”€ if we”€™re to call it that, inflated not because of “€œde-regulation”€ (the timeworn bugbear of the liberal-Left) but due to the close alliance between government and finance. Washington was “€œpro-market”€ in the sense that it acted as a virtual guarantor to Freddie and Fannie, urging them to do things like socially engineer increased minority home ownership and buy up more and more rotten mortgages this past spring in a vain attempt to stabilize the housing market. The Washington-Wall Street coupling has been a disaster, and yet no one’s willing to step in and break it up.  

Looking back on “€œBlack Monday,”€ I can”€™t help but feel sympathy for the tens of thousands of financial workers who”€™ve been asked to “€œmove on,”€ and whose families will suffer as a result. The fact that no one in Washington wants to learn anything from the crisis makes the situation all the more depressing.  


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