Thursday, October 4, 2012

Obama/Romney debate: Obama shows how tough it is to defend the indefensible

It should come as no surprise that in the first debate, President Obama showed how hard it is to defend the indefensible.

Specifically, President Obama had to defend his choice to continue pursuing the Japanese Model for handling a bank solvency led financial crisis begun under President Bush.  Under this model, bank book capital levels and banker bonuses are protected at all cost.

This leads to a number of policies like bailouts, mortgage modification programs that are designed to 'foam the runway', not prosecuting Wall Street for fraud and now talk of austerity.

It leads to appointing an economic policy team headed by Lawrence Summers and Tim Geithner.

It also leads to passing legislation like the Dodd-Frank Act that with the exception of the Consumer Financial Protection Bureau and the Volcker Rule was essentially written by Wall Street lobbyists for Wall Street.

By making an observation that applied equally well four years ago, Mitt Romney captured the real problem with President Obama's choice to continue to pursue the Japanese model.
Going forward with the status quo is not going to cut it with the American people who are struggling.
Four years ago, President Obama promised 'change we can believe in'.  What President Obama delivered was four years of pursing the Japanese model and protecting the status quo.

What makes the choice of the Japanese Model indefensible is there was and still is the choice of the Swedish Model for handling a bank solvency led financial crisis.

Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt in the financial system that they would ultimately realize if the long process of default, bankruptcy and foreclosure occurred.

Making banks absorb the losses protects the real economy, society and the social programs.

President Obama stills faces the choice between the Japanese Model and the Swedish Model because, as the Bank of England's Andrew Haldane observed, banks are still "prevaricating" about the value of their legacy assets.

What makes the on-going choice by President Obama to pursue the Japanese Model indefensible is Iceland's choice to pursue the Swedish Model was made at the same time President Obama came into office.

Iceland's has put the financial crisis behind it, its economy is growing, unemployment is falling and it enhanced its social contract by expanding its social programs.

By contrast, the US is still in the midst of the financial crisis with, as Paul Krugman put it, no end in sight.  The US economy is struggling and we are talking about rewriting the social contract by cutting social programs like social security and medicare.

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