Taming the Beast Paul Krugman March 24, 2008 – the New York Times

Taming the Beast Paul Krugman March 24, 2008 – The New York Times We’re now in the midst of an epic financial economic mess: in the short run, wartime crisis, which ought to be at the center of the spending actually stimulates the economy. election debate. But it isn’t. Remember, the lowest unemployment rate America has experienced over the last half- Now, I don’t expect presidential campaigns to century came at the height of the Vietnam have all the answers to our current crisis — War. even financial experts are scrambling to keep up with events. But I do think we’re entitled to Hillary Clinton has not, as far as I can tell, more answers, and in particular a clearer made any comparably problematic economic commitment to financial reform, than we’re claims. But she, like Mr. Obama, has been getting so far. disappointingly quiet about the key issue: the need to reform our out-of-control financial In truth, I don’t expect much from John system. McCain, who has both admitted not knowing much about economics and denied having ever Let me explain. said that. Anyway, lately he’s been busy America came out of the Great Depression demonstrating that he doesn’t know much with a pretty effective financial safety net, about the Middle East, either. based on a fundamental quid pro quo: the Yet the McCain campaign’s silence on the government stood ready to rescue banks if financial crisis has disappointed even my low they got in trouble, but only on the condition expectations. that those banks accept regulation of the risks they were allowed to take. And when Mr. McCain’s economic advisers do speak up about the economy’s problems, Over time, however, many of the roles they don’t inspire confidence. For example, traditionally filled by regulated banks were last week one McCain economic adviser — taken over by unregulated institutions — the Kevin Hassett, the co-author of “Dow 36,000” “shadow banking system,” which relied on — insisted that everything would have been complex financial arrangements to bypass fine if state and local governments hadn’t tried those safety regulations. to limit urban sprawl. Honest. Now, the shadow banking system is facing the On the Democratic side, it’s somewhat 21st-century equivalent of the wave of bank disappointing that Barack Obama, whose runs that swept America in the early 1930s. campaign has understandably made a point of And the government is rushing in to help, with contrasting his early opposition to the Iraq war hundreds of billions from the Federal Reserve, with Hillary Clinton’s initial support, has tried and hundreds of billions more from to score a twofer by suggesting that the war, in government-sponsored institutions like Fannie addition to all its other costs, is responsible for Mae, Freddie Mac and the Federal Home Loan our economic troubles. Banks. The war is indeed a grotesque waste of Given the risks to the economy if the financial resources, which will place huge long-run system melts down, this rescue mission is burdens on the American public. But it’s just justified. But you don’t have to be an wrong to blame the war for our current economic radical, or even a vocal reformer like Representative Barney Frank, the Is that simply an omission? Or is it an chairman of the House Financial Services ominous omen? Recent history offers reason Committee, to see that what’s happening now to worry. is the quid without the quo. In retrospect, it’s clear that the Clinton Last week Robert Rubin, the former Treasury administration went along too easily with secretary, declared that Mr. Frank is right moves to deregulate the financial industry. about the need for expanded regulation. Mr. And it’s hard to avoid the suspicion that big Rubin put it clearly: If Wall Street companies contributions from Wall Street helped grease can count on being rescued like banks, then the rails. they need to be regulated like banks. Last year, there was no question at all about But will that logic prevail politically? the way Wall Street’s financial contributions to the new Democratic majority in Congress Not if Mr. McCain makes it to the White helped preserve, at least for now, the tax House. His chief economic adviser is former loophole that lets hedge fund managers pay a Senator Phil Gramm, a fervent advocate of lower tax rate than their secretaries. financial deregulation. In fact, I’d argue that aside from Alan Greenspan, nobody did as Now, the securities and investment industry is much as Mr. Gramm to make this crisis pouring money into both Mr. Obama’s and possible. Mrs. Clinton’s coffers. And these donors surely believe that they’re buying something Both Democrats, by contrast, are running in return. more or less populist campaigns. But at least so far, neither Democrat has made a clear Let’s hope they’re wrong. commitment to financial reform. .

Load more