Obamanomics

Sen. Obama gave a speech (perhaps is still giving it) in New York today on the economy. Its a well written speech, and in my opinion does a good job of advocating a liberal economic policy. Of course, its not as nuanced and intelligent as McCain's "liberals no good, taxes bad" argument, but I think its pretty good nonetheless.

One interesting note of the speech is that it subtly lays at the feet of the Clinton's some of the economic problems we are having today:

Deregulation of the telecommunications sector, for example, fostered competition but also contributed to massive over-investment. Partial deregulation of the electricity sector enabled market manipulation. Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses and otherwise engage in accounting fraud to make their profits look better – a practice that led investors to question the balance sheet of all companies, and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand 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.

A decade later, we have deregulated the financial services sector, and we face another crisis. A regulatory structure set up for banks in the 1930s needed to change because the nature of business has changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.

The Glass-Steagall Act was repealed in 1999 by the Gramm-Leach-Bliley Act, which President Clinton signed. The "reform" of Glass-Steagall was promoted by Robert Rubin, Treasury Secretary under President Clinton and adviser to Senator Hillary Clinton. In his signing statement on the matter, President Clinton said:

Beginning with the introduction of an Administration-sponsored bill in 1997, my Administration has worked vigorously to produce financial services legislation that would not only spur greater competition, but also protect the rights of consumers and guarantee that expanded financial services firms would meet the needs of America's underserved communities. Passage of this legislation by an overwhelming, bipartisan majority of the Congress suggests that we have met that goal.

The Gramm-Leach-Bliley Act makes the most important legislative changes to the structure of the U.S. financial system since the 1930s. Financial services firms will be authorized to conduct a wide range of financial activities, allowing them freedom to innovate in the new economy. The Act repeals provisions of the Glass-Steagall Act that, since the Great Depression, have restricted affiliations between banks and securities firms. It also amends the Bank Holding Company Act to remove restrictions on affiliations between banks and insurance companies. It grants banks significant new authority to conduct most newly authorized activities through financial subsidiaries.

But it was not a unanimous (in fact, the bill passed the Senate with only one Democrat, Fritz Hollings, supporting it), and in what could certainly be called a "prophetic" statement on the Senate floor, the late Sen. Paul Wellstone spoke in forceful opposition to the passage of this bill:

Mr. President, this is the wrong kind of modernization at the wrong time. Modernization of the existing confusing patchwork of laws, regulations, and regulatory authorities would be a good thing, but that's not what this legislation is about. S. 900 is really about accelerating the trend towards massive consolidation of the financial sector.

This is the wrong kind of modernization because it fails to put in place adequate regulatory safeguards for these new financial giants the failure of which could jeopardize the entire economy. It's the wrong kind of modernization because taxpayers could be stuck with the bill if these conglomerates become ``too big to fail.''
[snip]
And what about the lessons of the Savings and Loan Crisis? The Garn-St Germain Act of 1982 allowed thrifts to expand their services beyond basic home loans. Only seven years later taxpayers were tapped for a multibillion dollar bailout.

I'm afraid we're running the same kind of risks with S. 900. These financial conglomerates may well be tempted to run greater risks, knowing that taxpayers will come to their rescue if things go bad. In a letter to me earlier this week, Professor Bob Auerbach of the LBJ School wrote, ``Taxpayers should be notified that [S. 900] substantially increases their risk on the $2.8 trillion in federally insured deposits for which they are liable.''

While the Clinton years were certainly good, and I give him a lot of credit for helping to open up the global markets, the fact of the matter is that regulation is often necessary to protect both the consumers and market place. Or as Obama said, "[The] American experiment has worked in large part because we have guided the market’s invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it."

Be sure to read the whole speech...I'm sure video is soon to follow.

Update: The Video