Sunday, November 30, 2008

Obama and Finance

While I have no regrets about supporting Obama over McCain, I did regard McCain as superior in two regards. First, he opposed subsidies for biofuels (not a trivial issue at a time of world-wide food shortaged). Second, he offered at least some sort of policy for tackling the financial crisis. Obama is talking about a stimulus package and, although I have some criticisms, the basic idea seems sound -- for Main Street, i.e., the real economy. But what about Wall Street? Thus far Obama has not offered any sort of plan for dealing with the financial sector, other than a general hint that he will follow the Bush Administration's policies, unchanged. In case he didn't notice, that hasn't been working too well. So far we have pumped huge amounts of money into the banks without much to show for it, and now the banks are coming back for more.

By contrast, Congress has been smart in dealing with the auto companies. When the Big Three approached Congress asking for a handout, Congress said come back with a plan for actual recovery and then we'll talk about it. This was doubly a good idea. First, it called for accountability. Before Congress gives any money to car manufacturers, it wants assurances that it will not go to waste. Second, it lets the car companies work out their own recovery plans instead of imposing one on them. Whether Congress accepts these plans or treats them as the initial basis for negotiations, at least we will know how taxpayer money is being used and will have some assurances it is not simply being thrown away.

It's time we started taking the same approach with banks. When a bank comes to the Obama Administration, hat in hand, asking for money, the Administration should require them first to come up with some sort of recovery plan that will account for how it will be used. Granted, banks are not entirely equivalent to the auto industry. Ultimately, we could let our domestic car industry fail. Everyone knows we will not let our domestic finance industry fail. But instead of the threat of failure, how about the threat of nationalization. We already nationalized Fannie and Freddie, as well as AIG. Why not tell the banks to start getting their financial houses in order, or Uncle Sam is taking over?

Besides requiring our banks to get their houses in order as a precondition for getting any more federal money, we should have regulators crawling inside every body cavity of every institution that needed bailing out, figuring out what went wrong. And then we should be creating a new set of regulations to protect banks from themselves and keep them from getting us into this mess again. We should be beefing up enforcement sectors of the government, both to enforce these regulations and to spot any new problems the future finance industry may be making for itself so we can act quickly to head them off. And quite probably we should be changing bankruptcy law to allow home buyers to renegotiate mortages instead of the all-or-nothing choice of pay or foreclosure.

Does the Obama Administration intend to do any of these things, or just to pass a stimulus package and continue its precedessor's financial policies? I don't know. But if Obama does intend to make any of these changes, he had kept mighty quiet about them.

One final word to Congress. Keep up the good work with the auto industry. Don't release any money to Henry Paulson. And when the Obama Administration comes asking for the remainder of the $700 billion, demand an accounting before releasing it.

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