Barack Obama visited Wall Street on Monday to deliver a message: the banking industry hasn’t learned the right lessons from our recent economic collapse and the Administration intends to make things right. Terrific. But did the President say everything that needs to be said?
Here’s the key section of President Obama’s speech :
[T]here are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation’s. So I want them to hear my words: We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.
That was a great indictment of Wall Street’s irresponsibility. But then the President narrows his argument by saying:
This crisis was not just the result of decisions made by the mightiest of financial firms. It was also the result of decisions made by ordinary Americans to open credit cards and take on mortgages. And while there were many who took out loans they knew they couldn’t afford, there were also millions of Americans who signed contracts they didn’t fully understand offered by lenders who didn’t always tell the truth. This is in part because there is no single agency charged with making sure it doesn’t happen. That is what we’ll change.
I appreciate that the President is making the case for a particular solution—an agency to oversee all risky financial products. But in order to get a handle on the excesses of Wall Street, I believe the public needs to hear and understand a larger point.
When the government allows—and even encourages—irresponsible corporate and individual behavior, who is most at fault? The corporations and individuals that took advantage of risky opportunities to make windfall profits or the government that allowed and/or created those opportunities?
I think it is the government—in this case the Bush Administration and the Federal Reserve—that is mostly to blame. The exotic financial instruments that ultimately collapsed world markets were the result of a willful refusal to regulate. The housing bubble that brought on the current Great Recession was caused by these instruments, artificially low interest rates, and other factors within government control.
Before Americans go along with the broad progressive solutions we need to fix our financial system—before people agree to strong government oversight—they need to understand the economic problem. The problem is government acting, or failing to act, based on conservative economic theory that the best market is a “free market.” This theory is fantasy.
American markets are not, and never were, free of government influence. There is no such thing as letting the market decide. The government is always involved, always biasing market results, always nudging and twisting and bumping around the so-called invisible hand.
Just open up the business page of any major newspaper and look for yourself. One company or industry wins a government subsidy. Another is forced to disclose finances by the SEC. The Fed increases or decreases the prime rate, affecting everyone’s ability to borrow. Another regulatory requirement is placed or revoked; another enforcement action is announced.
If conservative economists actually believed in free markets, wouldn’t they be railing against all the market distortions caused by government subsidies and preferences? But they don’t. That’s because they don’t really want government to keep its nose out of economic decisions—they want the government to step in and prejudice the market in their favor. They use the term free market not as a philosophy to follow but as a rhetorical device—albeit a hugely effective one—to skew public opinion toward conservative economic policy.
Progressive economist Dean Baker summarized the situation better than I can:
The market is just a tool, and in fact a very useful one. It makes no more sense to lash out against markets than to lash out against the wheel. The reality is that conservatives have been quite actively using the power of the government to shape market outcomes in ways that redistribute income upward. However, conservatives have been clever enough to not own up to their role in this process, pretending all along that everything is just the natural working of the market. And, progressives have been foolish enough to go along with this view.
Let’s muster a little cleverness of our own. Let’s tell the truth: It’s never a question of whether government will be involved in markets. It’s only a question of whether the government encourages fair markets or unfair ones. Wall Street has been the scene of one unfairly distorted market after another, and we've got to stop it.