HILLARY, OBAMA & A CRISE

HRC's Odd Economics
http://robertreich.blogspot.com/2008/04/hrcs-odd-economics.html

Senator Hillary Clinton said today that her rival for the Democratic presidential nomination has been “timid and unenthusiastic” in his proposals for dealing with the current economic downturn. This is an odd charge, to say the least. Her proposal is to have government purchase securities containing non-performing mortgage loans – securities whose worth is unknown because the bad loans were repackaged by mortgage lenders with good loans and then resold – and then restructure them (with lower interest rates at longer, fixed terms) so homeowners would have a better chance paying their mortgages. Obama supports and co-sponsored (as did HRC) a proposal developed by Senator Christopher Dodd and Rep. Barney Frank which would leave the restructuring job to investors who – backed by enough of a government guarantee to make the task feasible – would buy the securities. Given that the Dodd proposal is on life support in the Senate right now, HRC’s more ambitious plan has no prayer of becoming law. But even if it did, it makes no sense. How could anyone be sure the government bought the securities at a price that reflected their true “worth” when there’s no market to determine their worth to begin with? The whole idea behind the Dodd-Frank proposal is to create such a market. HRC’s other idea is to create a commission on foreclosures, headed by Alan Greenspan, Bob Rubin, and Paul Volcker. Yet Greenspan is more responsible for the housing mess than any other single person in Washington or on Wall Street. It was, after all, Greenspan whose Fed lowered short-term interest rates be lowered to 1 percent in 2003 – making money so cheap that every financial institution eagerly lent it to any halfway sentient human being. And it was Greenspan who argued that neither the Fed, the Commodity Futures Trading Commission, nor any other pertinent oversight agency should bother to watch whether financial institutions were behaving themselves. Bob Rubin, for his part, joined Greenspan in successfully urging Congress in the late nineties to repeal the Glass-Steagall Act, the last remaining edifice separating commercial from investment banking – enabling Citigroup, which Rubin thereafter joined, to acquire Traveler’s Insurance. A commission headed by two of the people most responsible for deregulating Wall Street in recent years is unlikely to devise ways to prevent another Wall Street crisis. (Volcker, who headed the Federal Reserve before Greenspan, is an Obama supporter.) Obama, by contrast, has called for legislation requiring that investment banks, hedge funds, and other non-bank financial institutions possess capital and liquidity proportional to the risks they’re taking on – something that neither Treasury Secretary Hank Paulson nor, for that matter, HRC, has advocated. Yet this is the only sensible way to avoid future messes like this, especially if the Fed is going to be the lender of last resort to these as yet unregulated Wall Street institutions. Obama's response to the current crisis is exactly right. HRC's make no sense at all.