What Obama Could Teach the Treasury Secretary About the Economy [View All]

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http://www.prospect.org/cs/articles?article=what_obama_could_teach_the_treasury_secretary_about_the_economy

What Obama Could Teach the Treasury Secretary About the Economy

Treasury Secretary Henry Paulson wants to expand the Fed's powers to bail out struggling investment banks. Obama understands that this would only encourage damaging speculation.


Robert Kuttner | April 4, 2008 | web only



For a stark contrast in thinking about the cause and cure of the financial crisis, compare the recent speeches and proposals by Treasury Secretary Henry Paulson and Senator Barack Obama.

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In striking contrast to Paulson, Obama seems to grasp what has occurred and what needs to be done, namely a sweeping overhaul of federal financial regulation and not just more reliance on the Fed. "When the Fed steps in," he declared in his New York speech last week, "taxpayers have every right to expect that these institutions are not taking excessive risks."

Obama, unlike Paulson, proposes specific remedies -- far greater disclosure, tougher capital requirements, and strict prohibitions against conflicts of interest. Obama declared, "If you can borrow from the government, you should be subject to government oversight and supervision. Capital requirements should be strengthened. Transparency requirements must demand full disclosure by financial institutions to shareholders and counterparties." Obama also called for tough new regulations against conflicts of interest.

Harnessing Wall Street to serve the public interest will be a heavy lift politically. Some in Obama's party, such as his rival Hillary Clinton, have painted the mortgage crisis mainly as a self-contained problem, rather than a symptom of financial markets run amok. Last week, Clinton proposed naming two of the prime sponsors of deregulation, Alan Greenspan and Robert Rubin, as wizards to devise a solution.

As Paulson's ill-timed effort suggests, the free-market experiment has failed but the melody lingers on. There is still a large political undertow, from private financial elites that want government to stay out of their way. Despite the practical failure, it will take Roosevelt-scale political leadership to achieve a counterrevolution. If he's elected, we will find out whether that describes Obama.

This article originally appeared in the Boston Globe.