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But to Wolf conservative morphs into cautious, which translates into long-term failure. Much of his larger critique of Obama hinges less on the economics of the situation, and more on a projection about the politics. This resembles the widespread argument against stress tests when they were first announced. The tests were certain to fail, thus forcing the government to return to Congress for more money for the banks, which it would refuse to appropriate. And then we'd really be screwed. Needless to say, some folks believe the tests did fail, but so far private markets seem to be providing the extra capital, not Congress. Not that there aren't many reasons to worry. Wolf is worried that banks will have enough capital to get by but not to expand lending. He's worried that we are creating another bubble. He's worried that by not breaking up the banks, we'll end up with institutions that are too-big-to-fail, thus recreating the debacle of Fannie Mae and Freddie Mac as government sponsored entities, right down (this is me, not him) to the "GSE discount" and the absence of moral hazard. Most of all, he's worried that we don't have the regulatory apparatus to deal with a revived banking system that may, post-crisis, possess even greater size and clout. Wolf is right to worry. But some perspective is necessary here. A few months ago, we would have been delighted to see credit markets functioning again, unemployment slowing, the stock market up and banks not collapsing. Maybe it's a sucker's rally, but still, in January stability seemed like a dream, so this is no small achievement. Wolf skirts around the issue of nationalization, but one should ask, where would we be today if the government had seized Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC) early in the year? After all, that's essentially what the Brits did, and Wolf has been decrying the fiscal situation in the U.K. ever since. What would be the effect of nationalizing the banks and sending Chrysler LLC and General Motors Corp. (NYSE:GM) into Chapter 11? What about the rest of Obama's agenda? In theory, nationalization has a sort of elegant logic (which is the same sort of remorseless logic that often lurks behind IMF recommendations in emerging nations, sometimes to good effect, often to bad). But how much more pain, and how much longer, would the U.S. have to absorb if an aggressive nationalization campaign had been launched? On the other hand, Wolf is correct in that this stability policy does have costs that have to be met. By arguing that some banks should have been seized and recapitalized to expand their lending, Wolf is suggesting that he believes that most of the components of a liquidity-generating system, including securitization and derivatives, need to be brought back online in some sensible fashion. This puts him at odds with more radical voices in the nationalization camp, who seem eager to return banking to a post-Great Depression utility status. You can't have everything: an expanding loan book, more and more tightly regulated capital, no use of techniques to lay off risk -- and growth. Somehow, shadow banking has to be brought into the light of day if you want to see growth, but it has to be channeled and regulated. The fact is the regulatory problem would loom, with all its potential for political failure, whether banks were nationalized and broken up or not. Institutions want to grow, not only to make more money, to seek more markets, but to protect themselves from predators; and that fact has to be acknowledged in any regulatory scheme. Regulated utilities tend to become uncompetitive, a reality as obvious as regulatory capture, but one we've managed to forget in our anti-free market zeal. Given the choice of completely reinventing the financial system, from hedge funds to big banks, based on a theory, might it not be better to stabilize the system, and turn to the task of reforming regulation sooner, rather than later? Or is Wolf suggesting that we need to suffer some more to be in the proper state of mind for that difficult task? Now that seems to me conservative. - Robert Teitelman See Wolf's column from the Financial Times Robert Teitelman is the editor in chief of The Deal.
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From: JolashB,
That article is so true! Somehow, shadow banking has to be brought into the light of day if you want to see growth, but it has to be channeled and regulated. So did you know that the nation's and the world's largest banks are removed from the everyday, institutions of billions of dollars, totally beyond the reproach and scrutiny of the common man. However, it is the largest banks that need us to bail them out of the hole they dug for themselves. Our leaders passed a huge $767 billion stimulus package, as installment loans to these business titans, in order to give them capital and stimulate bank lenders to start lending. Obama has put a stress test into effect that will essentially point out which of these enormous companies are weak, and which ones are on track. The largest banks better start paying their short term loans off – they were paid for by the people.
Posted on:
May 14, 2009 6:48 AM
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If you thought it was over, forget it. In Wednesday's Financial Times, Martin Wolf 
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I certainly agree that Obama is following in FDR's footsteps, but to call that conservatism is intellectual prostitution of the most profound degree. FDR's tripling of taxes, his suffocating regulation of business, his relentless anti-business propaganda and his labor policies worsened and prolonged the effects of the Depression. His interventionist policies, like Obama's, had no roots in anything historically American and he willfully undermined the Constitution, the rule of law, and every major principle for which our ancestors stood.