A P.S. On Obama's Wall Street Address
Readers have been writing about this column on President Obama's markets speech. Nicole Gelinas also wrote on the speech. What the readers are asking is: isn't it inconsistent to praise the president for creating some mechanisms to manage companies/banks in crisis even as you attack him for suggesting we out to have a system for too big to fail banks? The answer is: not necessarily.
Optimal would be a set of rules that includes protocol for bankruptcies and a line that says: no bank is too big to fail. As Allan Meltzer has said, "if something is too big to fail, it is too big." In other words, the rules would make clear exactly what the federal role is when an institution fails -- as a monitor, not a wallet.
Absent in the president's remarks is an understanding of the opportunities available in a crisis like this one. Because of the current uncertainty, some players will be able and willing to take big risks to make big profits. Those risk takers aren't just profiteers. Sure they make money, but they often, also, innovate as they do it, in turn generating productivity gains that raise the standard of living for the rest. The best scenario of American markets offered by the Obama speech is a mutual fund country with lots of junk GDP growth -- i.e, a place like Europe. That scenario cannot sustain the economic progress to which Americans are accustomed.
New Dealer Ray Moley once wrote to Felix Frankfurter that "the problems of economic life were matters to be settled in a law office, a court room, or around a big labor-management bargaining table. These problems were litigious, controversial, not broadly constructive and evolutionary. The government was the protagonist. Its agents were its lawyers and commissioners. The antagonists were big corporate lawyers. In the background were misty principals whom Frankfurter never really knew at first hand and who were chiefly envisaged as concepts in legalistic fencing. These background figures were owners of the corporations, managers, workers and consumers."
Updating for the current administration's worldview, you'd have to include the consumer at the table -- President Obama did that. But not the producer. The producer is still a misty background figure.
