Saturday, April 21, 2012

Pursuit of Obamacare doomed financial reform

In a Bloomberg column, Jonathan Alter argues that pursuing Obamacare in 2009 did not ultimately have a material effect on financial reform.

Underlying his argument is the critical assumption that the banks' lobbyists would have been as effective in completely neutering financial reform in 2009 as they were in 2010.

Compare pursuing financial reform beginning February 1, 2009 versus February 1, 2010.

On February 1, 2009, all of the major banks were still recipients of an explicit bailout from the US taxpayers in the form of TARP funds.  By February 1, 2010, most of the major banks had repaid these funds (see SigTARP report).

On February 1, 2009, none of the major banks had passed a stressed test and received the explicit backing of the US Treasury to add as much capital as was necessary to keep them solvent.  By February 1, 2010, all of the major banks had received the US Treasury's explicit backing.

I realize that politics is the art of the possible, but what was possible on February 1, 2009 was dramatically different that what was possible on February 1, 2010.

What was possible on February 1, 2009 was true financial reform.   What was possible on February 1, 2010 was the Dodd-Frank Act, which with the exception of the Consumer Financial Protection Bureau and the Volcker Rule was an act written by and for the banks.

The Democratic Party “paid a terrible price for health care,” [Representative Barney] Frank said.... What’s surprising is how many Democrats, with the benefit of hindsight and speaking sotto voce, agree with Frank. 
Although they support the substance of the law, they are appalled by its political fallout and wish they had a do-over. 
Their thinking was summarized this week in the National Journal by Michael Hirsh, who wrote that by embracing health care reform amid the economic crisis, Obama confused his priorities and took his eye off the ball, much as President George W. Bush did when he invaded Iraq instead of worrying more about al-Qaeda.... 
Hirsh argues that Obama should have stayed focused on the economy not for appearances’ sake but because it was worse off than he and his closest advisers recognized. This wrongly assumes that he could have done substantively more to spur a rebound or keep the benefits of recovery from skewing toward the top 1 percent.
Hirsh and the Democrats correctly assume that it would have been dramatically easier to effect true financial reform.
Liberal critics rightly say that Obama should have had a broader circle that included liberal economists. But their remedy -- restructuring of the banks -- turned out to be unnecessary for reviving the economy and would have cost, by some estimates, several hundred billion dollars on top of the Troubled Asset Relief Program.
Requiring the banks to absorb all the losses on the excesses in the financial system would not have required a penny of taxpayer money.

All it required to adopt this policy is that anyone in the Obama administration understood the simple fact that with deposit insurance and unlimited liquidity from the central bank our modern banking system is designed so that banks do not have to be bailed out.

As shown during the Less Developed Country Loan Crisis and the Savings & Loan Crisis, banks can continue in operation and support the real economy while they are insolvent.

By continuing with the policies of the Bush administration, the Obama administration managed to transfer to the real economy the losses that the banks could and should have absorbed.

The Obama administration managed to compound this mistake by not pursuing financial reform in February 2009, but instead pivoting to health care reform.

Excuse me, but what happened to the Presidential candidate who chided Senator McCain  about being able to do two things at once?  Didn't he think that Congress was capable of passing both financial and health care reform in the same year?
It’s important to remember that Obama began his presidency with economic recovery, not health care. In his first month in office, he pushed through a mammoth stimulus package that, contrary to the analysis of Drew Westen and others, was as big as Congress would allow. 
There was no political appetite for a second stimulus before the first had even kicked in -- the period when health care was on the table. In other words, the opportunity costs of health-care reform were zero.
Actually, the opportunity cost of health-care reform was true financial reform.  For example, would the Too big to Fail banks still exist had financial reform occurred in 2009?  Would sunlight have been shown on the opaque, toxic structured finance securities?
But let’s not pretend health-care reform was a fatal Iraq- style distraction from the main event. 
Instead of costing thousands of lives, it will potentially save many more with its incentives for preventive care, among other historic provisions.
By not focusing on reforming the financial system, President Obama has set up a situation where we are now talking about the need for austerity, changing the social contract and reforming retirement programs like Medicare and Social Security.

There is no doubt that even if the Supreme Court does not rule it unconstitutional, Obamacare will also be included for cutbacks.  As a result, it is not clear that any of the benefits of Obamacare will be recognized.

What is clear is that by continuing the policies of President Bush, the Obama administration policies put the banks ahead of society.  By comparison, Iceland pursued policies that put society ahead of the banks.

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