We're watching as critics blame the administration for not having immediate success with policies which weren't promised to take immediate effect. The Obama administration said from the get-go that the stimulus plan's benefits wouldn't be seen until the end of this year and well into 2010. My own take on the criticism is that it's purely political and its main purpose is to shoot down any prospect of healthcare reform as "irrelevant" and "too costly" now -- or ever.
David Brooks takes aim at healthcare proposals in his column today.
On the other side of the editorial page, Paul Krugman asks how we should respond to the unemployment reports and criticisms of the stimulus plan. Blame Obama? And, more to the point, how should the administration respond to its critics?
It’s also reasonable for administration economists to call for patience, and point out, correctly, that the stimulus was never expected to have its full impact this summer, or even this year.
But there’s a difference between defending what you’ve done so far and being defensive. It was disturbing when President Obama walked back Mr. Biden’s admission that the administration “misread” the economy, declaring that “there’s nothing we would have done differently.” There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor’s inability to admit mistakes. And that’s an attitude neither Mr. Obama nor the country can afford.
What Mr. Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he’s trying to steer the country through a severe economic storm, and that some course adjustments — including, quite possibly, another round of stimulus — may be necessary.
What he needs, in short, is to do for economic policy what he’s already done for race relations and foreign policy — talk to Americans like adults.
James Galbraith, one of the economists who anticipated the crash and how it would happen -- and who has consistently been right about what's needed to turn the economy around -- testified yesterday before a subcommittee of the House's Finance Committee. The hearing focused on the Federal Reserve's role in financial regulation, on whether the Fed is a rogue agency or whether it has Constitutional legitimacy, and above all how the government can effectively oversee systemic risk in large financial institutions.
If you're at all confused about the role of the Fed, Galbraith's opening statement is helpful.
So why, if "no one saw it coming" didn't we see the crash coming? Actually quite a few people like Galbraith, other economists, and even lay people and investors, did "see it coming." What was lacking was an official arm of the government whose only job is to focus on and evaluate systemic risk on an ongoing basis and call attention to the potential dangers. Should such an office be created within the Fed? No -- too easy for the Fed to "not see it coming" again.
To avert the development of dangerous practices within large institutions, systemic risk regulation needs to be deeply integrated into ongoing examination and supervision. Essentially,the job is to recognize emerging patterns of dangerous behavior. This function is best of regulatory capture or institutional identification with the interests of the regulated sector.That agency is the FDIC. The FDIC could establish a bureau for T1-FHCs ["Tier One Financial Holding Companies"] and stock it with the most experienced examiners, accountants, criminologists and statisticians, whose purpose would be to identify dangerous practices in systemically dangerous institutions and to stop them. Their function would not differ greatly from what the FDIC already does, except insofar as the supervised entities are not covered by the deposit insurance. But the point of designating T1-FHCs is to admit that there is taxpayer exposure in the failure of such institutions, so that from a functional point of view this is a distinction without a difference.
In short, if systemic risk is to be subject to consolidated prudential regulation, why not place that responsibility in the hands of an agency for whom it is the first priority? Heading off systemic risks requires a culture of examination, of accounting, and of actual enforcement,including criminal referrals where fraud is suspected. The FDIC and related entities are better suited to the job of examination and regulation, because they specialize in it.
Should some institutions be considered "too big to fail"? No.
Galbraith, of course, is one of the economists who, along with Paul Krugman, saw the original Obama stimulus plan as too lean and mean. The very critics who now are using the stimulus package against the administration -- Republicans and blue dogs -- are the very people who curtailed its impact with their votes. They are also the very people who are determined to defeat any real healthcare reform, even though the costs of healthcare as it's presently set up could put us in another, bigger crash not long from now.
Go figure.
Nice post, PW. Way to pull those threads together. :)
Posted by: Dan | July 10, 2009 at 08:04 AM
Easy, but thanks. First a scan of the Krugman piece -- always comes first. Then open an email from Jamie with a link to his testimony. (Then the hell: converting PDF paragraphs into something typepad will accept!!) If you're interested in what Galbraith has to say, Dan, the other link he sent might be of interest.
Posted by: PW | July 10, 2009 at 08:56 AM