The Timidity of Reform

But will it work? This is what someone asked me last Friday after Congress sealed the deal on the financial reform package for the banks. My simple answer is that there are some nice reforms here, but much like the health care law, the economic stimulus bill, and the other reforms of the Obama Administration, this too was short of real reform, demonstrating once again the timidity of this president and Congress in addressing real reform that matters.

Economically, there are multiple problems with the US and world economy. One way to slice it is to look at short and long term needs. Short term the problems in the economy are the high unemployment figures, the still depressed real estate market, and slow economic growth. Longer term the problems are many, including financial institution instability, energy consumption, and a looming debt crisis.

The bank and financial regulation bill agreed upon last week addresses some of the longer term problems, but not all of them, and does little for the short term. Long term the best potential features of the bill are the Volker Rule to limit bank speculation and the creation of the consumer credit protection agency. At present the agency looks weak but perhaps over time it can use its administrative rule making to actually do real work to help consumers.

Having said the good things, the bill falls short on real reforms. Real reform should have reinstated Glass-Steagall, imposed more requirements on banks holding capital to cover losses, extended more regulations to cover non-bank financial institutions, and made it illegal for institutions to do hedge funds that bet against their investors.

It might have also made sense to consider policies that make it illegal for FDIC entities to speculate on Wall Street, something similar to a Glass-Steagall requirement. Finally, limits on compensation packages for officers to depress financial incentives to speculate make sense. All of these ideas would help, as would be preventing banks from selling office mortgages that finance (so that they have to bear the risk of their loans). However, even with all these reforms, it is still not clear banks will serve the public interest. Remember, they are private for-profit entities that are not there to serve the public good. This is the purpose of government regulation.

Government regulation is meant to address market failures and correct externalities and moral hazards that the free market cannot address. Beginning in 1978 the USA has been on a deregulatory path, placing firm belief in the market over the government. The Reagan-Thatcher era is famous for this. Obama took office with the promise of change, and he has made some, but they have not signaled the full repudiation of the Reagan Era. Ronald Reagan is dead, but we do not see a real return to regulatory behavior anywhere near the like of the New Deal or close to the scope of what is needed for the economy.

The 2009 economic stimulus was too small and we are now paying the price with a sluggish economy on the verge of a second recession. We never addressed the core problem with the economy–the collapsed residential home market–and now it is slipping again and defaults continue. The health care bill ensures more but does little to address cost containment or quality. Consistently, Obama and Congress have gone less the distance to fixing the problems.

Thoughts on Moscow

Last week I was in Moscow, Russia for three purposes. The first was to give a paper at Moscow State University, the second was to give a talk at the American Corner, the third to see friends, the sites of the city, and to see how the city has changed over the last three years.

The paper that I gave was entitled “The Crisis of Public Administration in a Post-Global World.” The basic thesis was that the global financial collapse and the attendant state bailout of banks had effectively killed off the legitimacy of market fundamentalism and theories of the minimal state that had commenced with the arrival of Thatcher in the UK and Reagan in the USA. This paper was part of the a larger conference on public administration held annually at Moscow State University. I have now been to the conference twice, both times having a great time.

The second part of the trip was to give a lecture at the American Corner, Moscow. The US State Department has American Corners around the world, providing cultural information to audiences in different countries. In the past I have given talks at the American Corners in Hungary and Slovakia. My talk in Moscow was on Obama and the 2010 elections. The audience had about 45 in attendance, mostly including students as well as a mixed crowd. They asked good questions about America, expressing skepticism about our financial regulatory reform and the seriousness of the USA in pursuing environmental policy and changes. In effect, they asked where was the US in providing leadership in addressing global warming, for example.

The third and most fun part of the trip was seeing friends, sites, ands how the city had changed. Moscow felt safer to me now than the first time, and even more western than before. Capitalism has changed Moscow, with it being more European in its feel, and less isolated. US business seems generally lacking here, with Germany and the UK more dominant. Perhaps the reason is that the USA is unwilling to change how it does business to access Moscow. I say an article in Russia that indicated that the US chicken or poultry business refused to change the way it operated. Specifically, it used chemicals to clean poultry that were banned in Russia. US business seems unwilling to change to gain accommodate and gain access. It seems as if we think everyone should accept our standards and follow our lead. Such arrogance does little help foster trade.

The one funny thing while in Moscow. I was with two students and we were thirsty and needed a snack. They wanted to go to the new Starbucks that had opened. It was in a new business complex featuring Price Waterhouse. The building was new and built were an old traditional Russian building had stood. This Starbucks was the trendy place for the youth and trendy. As I sat there the background music was Gershwin, Sinatra, and Ella Fitzgerald. The music was the American songbook.

As we toured the city I saw some old and new sites. Of course Red Square was a stopping point, as was Pushkin Square. I also visited the Tretyakov State Gallery–the best collection of Russian Art in the country. I especially liked the Russian Impressionism.

Beyond the tours I visited old friends–Ana and Ana–and met new ones such as Kate, Dunya, and Daria. All were my interpreters or translators. All were or are students at Moscow State University. I had a terrific time with them all.

Overall, Moscow was fun. The larger meaning to this blog entry, if any, is simply that Moscow and Russia are politically and economically important players. The real revolution here will occur when the young students take over and the old generation dies off. The new generation, born after the breakup of the USSR, is full of hope, new attitudes, and a spirit of change and freedom that will really change this country. I had this same feeling in Armenia and Hungary too. Revolution is generational.