An Issue Where No One Wins
This is not a political blog. That’s not to say that I don’t have opinions on politics, but I try to keep them off my blog for the most part. But, as Bloomberg notes, why aren’t any of the major candidates talking about the credit crisis? There’s a simple answer: no one has a solution to an intractable problem, and so they say nothing.
Part of this is the Faustian bargain that politicians of both parties have regarding the economy. They like to provide the illusion that their policies produce prosperity, and take credit for it, while being quiet when the economy is poor, unless they can blame it on the other party.
Personally, if I were Obama or McCain, I would be concerned about what I would do about the problem if I were elected. Wait, I would tell people there’s not a lot that can be done aside from increasing immigration on a controlled basis. But that doesn’t get votes in the US, because we are biased toward action, even if it is useless or harmful.
August 28th, 200810:04 am at
That solution would actually LOSE votes, given the general (and misguided) attitude toward immigration.
Let me suggest another alternative. What if the most effective solution does not have the glib, immediate appeal that is so necessary to win the swing states? If you were economic advisor to a candidate, what would you suggest?
August 28th, 200810:50 am at
As an outsider to the financial community — there is something very weird about this crisis, as the economy keeps ticking along and corporations seem able to finance their activities well enough.
One hypothesis: there was a bubble in financial services, as the profits of that sector increased incredibly over the past few years (FT had a chart on this a few weeks ago). Perhaps that has now been pricked, but the wind-down is having little impact on the rest of the economy.
August 28th, 200811:54 am at
I have no doubt that it would lose votes. In a prior article, I suggested one way to help solve our financial crises is to allow foreigners to gain US citizenship (subject to restrictions), if they buy a house of sufficient value free and clear.
Having wealthy foreigners gain US citizenship has many benefits including the influence they bear in their home countries.
Jeff, there are no good glib solutions, just as there are no $20 bills on the sidewalk. They either weren’t there, or were picked up already.
After the election, I would have advice. Slowly ratchet down the leverage in the financial economy. Bar certain types of structured investments from regulated financial institutions. Fund the SEC higher, and pay some people at investment banker levels who have the mental capacity to regulate investment banks, given the systemic risk that they pose. Eventually RBC requirements on investment banks will make it less economic to do as many derivative contracts.
I might have more, as I think about this more, but there’s not a lot that can be done in the short run. I would be forthright with the American people, and tell them that the nation as a whole will endure pain, because we did not effectively regulate mortgage lenders, banks, and GSEs. Just as soldiers undergo disproportionate hardship for the nation, in the same way, citizens have to endure some pain for the good of the nation as a whole.
But that is not generally a vote winner. Upon reflection, many will agree with it.
August 28th, 200811:58 am at
JVD — Foreign demand is stimulating US GDP, but domestic consumption is not growing as rapidly as it was, say, 2-3 years ago.
August 28th, 20084:36 pm at
No one has a solution to an intractable problem? There’s a solution; it is too distasteful for anyone to swallow.
Since the late 1970s, there has been a steady stream of successful lobbying on the part of the financial services industry that has mutated American culture into a borrow and hope society.
Let me pick on mortgage lending, since it has been front and center in the media recently (and is a large part of what I am describing). Why should someone get tax benefits for borrowing money to buy a house, for example? You’d have to be a fool to save up for a house in that environment. Why establish quasi-governmental institutions whose role is to subsidize mortgage lending? All government policies vis-a-vis housing seem to encourage borrowing, while savers are left sucking fumes. And this was just a couple of mortgage examples. There are countless policies that encourage debt and discourage saving.
We are a debt society by the design of government and the financial services industry architects. This is a stretching rubber band that needs to snap back into place before it breaks.
The solution is not intractable. It is just painful; so, we kick the can down the road, hoping the death comes before reckoning. The great great great grandchildren can deal with it while we get high.
August 28th, 20085:49 pm at
I just read a statement from the ruling political party in New Zealand (they are in the same predicament we are in this country); talk about an intelligent assessment and plans for the future! Hey, I thought the US was supposed to be the most intelligent and forward-looking. (just listen to any speech by a politico in this country and drive through most major cities and you will understand)
August 28th, 20088:12 pm at
Why not a windfall profits tax on investment bankers. Admittedly, they don’t have much profit now, but there is far more investment banking than there is a real need for. If we could disincentivize huge profits IB’s make, we could limit the number of leveraged risky products pushed onto investors who should know better. At least the government could raise some money to help bail them out when it all blows up, like it always does.
August 29th, 20088:39 pm at
The attraction for immigration from emerging markets is not quite as strong as it used to be — check with graduate school admissions committees.