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Financial stability, Obama, Romney, Paul, Huntsman [ClearOnMoney]
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Financial stability, Obama, Romney, Paul, Huntsman

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Commentary

Financial stability, Obama, Romney, Paul, Huntsman

12 Jan 2012 by Jim Fickett.

There are two candidates who would (1) be open to radical reform in the banking industry, and (2) support taking care not to erode constitutional rights in the “war on terror”. These are Ron Paul and Jon Huntsman.

No, I'm not going to get deeply into politics, but I would like to comment briefly on the candidates from the point of view of financial stability.

The two biggest issues

The first big political issue for financial stability is that too-big-to-fail banks were bailed out without changing the status quo (All that talk about tighter regulation, All that talk about tighter regulation, 2). Without changing the status quo, we are very likely headed for another financial crisis worse than the last one.

The second big political issue is the rule of law, in particular, the gradual repeal of the constitution under the guise of a “war on terror”.

Obama

One of my biggest worries about Obama four years ago was that he apparently had little understanding of the financial system. It was an unfortunate time for someone who didn't understand banks to lead the country. Obama appointed Larry Summers, a brilliant debater and academic politician who didn't (and doesn't) understand investing or the real economy, as his economic adviser; that is part of the reason that we got a no-strings-attached bailout of the banks.

Since Obama was elected, my biggest disappointment has been that he has continued the huge erosion of civil rights that Bush started. For example, he recently signed the National Defense Authorization Act which, as described by the New York Times, “could also give future presidents the authority to throw American citizens into prison for life without charges or a trial.”

Romney

Romney is very well liked by the big banks. Whatever else you might like about him, that alone is very worrisome.

Paul

There are only two candidates that would be good for financial stability. One is Ron Paul. Many people, including most reporters at large newspapers, do not take Paul seriously, resorting to name-calling and jokes. The reason for this is that Paul does not play by the Washington rules, and has relatively low influence in Congress. On the one hand, then, one must admire Paul for sticking to his principles but, on the other hand, if he were president, we would probably see very little real coordination with Congress, which means he might not accomplish very much.

Paul would greatly slow the implementation of unconstitutional abridgement of civil rights. His position is clear in this area; regarding the NDAA, for example, he said in Congressional debate:

Should we err today and remove some of the most important checks on state power in the name of fighting terrorism, well then the terrorists have won … detaining American citizens without a court trial is not American. …

I am simply arguing that particularly American citizens should not be sent to a foreign prison without due process.

The Economist calls Paul “wacky” and takes it as perfectly obvious that his desire the “end the Fed” is a crackpot idea. Is it really? The Federal Reserve has many functions; let's consider each of them separately:

  1. Data provision. I've mentioned before the the Fed gathers and publishes a great deal of useful economic data. We certainly wouldn't want these data to go away. However I'm sure the BEA, which provides the National Accounts, would be quite capable of providing the Flow of Funds and other Fed data as well.
  2. Bank clearing. This is a mechanical function that is, of course, indispensable, but could be done just as well by the banks themselves.
  3. Regulation. The Federal Reserve is hopelessly conflicted as a regulator. They were warned many times by small banks that mortgage lending was completely out of control, yet as late as 2006 were still completely (and I would say willfully) blind to the problem. The use of the AIG rescue as a backdoor bailout of Goldman Sachs provides another example of clear regulatory capture.
  4. Economic research. It is a nice luxury that the Fed can carry out a great deal of economic research, but this could be done in academia.
  5. Monetary policy. Economists all take it as obvious that active monetary policy makes things better, not just in the short run, but over multiple business cycles. I am open to the idea, but I have never seen any argument based on real-world data (as opposed to model theoretics) to support it. And there is considerable evidence that Greenspan's easy-money policy contributed to the crisis.
  6. Lender of last resort. This, I think, is the only function of the Federal Reserve that we really need to have in a central bank. But the current Federal Reserve is so partial to the large banks, and so secretive, that we do not need or want to have that function in the current institution. So if Paul is open to a new, much more limited central bank, under fresh management, with just this role, the idea is certainly worth discussing.

The Federal Reserve, coordinating closely with the Treasury, handled the banks with kid gloves during the crisis, and passed the long-term costs on to the taxpayer. Reconsidering all the functions of the Federal Reserve would be a great start on real reform.

Huntsman

Jon Huntsman has gotten relatively little attention so far, but it is worth noting that he understands the too-big-to-fail problem is central, and he wants to do something about it. He is the other candidate who would be good for financial stability.

Simon Johnson, former chief economist at the IMF, wrote in a New York Times blog,

More bailouts and the reinforcement of moral hazard — protecting bankers and other creditors against the downside of their mistakes — is the last thing that the world’s financial system needs. …

This week we also learned more about the underhanded and undemocratic ways in which the Federal Reserve saved big banks last time around. …

Is there really no alternative to pouring good money after bad?

In a policy statement released this week, Jon Huntsman, the former governor of Utah who is seeking the Republican presidential nomination, articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem: too-big-to-fail banks:

To protect taxpayers from future bailouts and stabilize America’s economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices.

Huntsman seems to be rather better informed on financial matters than any other candidate, even holding an opinion on the Basel III bank capital rules:

Mr. Huntsman has also spotted the fatal flaw in Basel III: “The Basel III Accord primes the pump for the next financial crisis by putting its thumb on the scale of sovereign debt, making it less expensive for banks to invest in those instruments without making a realistic risk assessment.” Again, in the light of recent developments in Europe, who can dispute this?

It is a good sign that the banks don't like Huntsman:

The banking industry, which has weighed in heavily for front-runner Mitt Romney, the former Massachusetts governor, hasn’t been a major source of funds for Huntsman. The campaign, which was $3 million in debt in September, according to the most recent data available, received only $33,750 from employees or political action committees of commercial banks, according to the Center for Responsive Politics. Romney received $542,250 from commercial banks and their employees over that same period. ‘That’s Okay’

“I’m not going to get a whole lot in contributions from Wall Street or the bankers,” Huntsman said with a laugh at yesterday’s town hall. “But that’s okay.”

The ACLU reports that Huntsman worries about the erosion of constitutional rights in the “war on terror”.