It's never a good sign when your Treasury Secretary announces a plan to overhaul the financial system and the market plunges 200 points that same day. But that's what happened on Monday to President Obama.
It's no better when you, the president himself, release the details of that plan two days later and the market nosedives again as you are speaking. And it's certainly not a good thing that during the big rollout week of the financial stabilization plan, the VIX--the volatility index aka the "fear index"--shoots through the roof after a long period of steady decline.
Obama's plan calls for a uber-regulator, a new entity made up of a counsel of great minds, who would scan beyond the horizons of normal financial regulators--beyond banks to any entity that they deem poses financial risk, beyond national borders to any hedge fund, venture capital shop or holding company that dares invest in a U.S. financial firm, beyond the present into the future.
Gone are the days when bank regulators have their powers limited only to banks, or national regulators only to domestic companies, or police powers only to crimes already committed. This entity's job is not just to enforce the rules. Its job is to create rules, to "find gaps in the regulations" and fill them. The grammar of the uber-regulator is not just expressed in the imperative voice of law, or the declarative voice of finding; it speaks in the subjunctive mood as well, about what might and ought to be.
But perhaps Geithner, Summers, Bair and Bernanke are up to the challenge. Perhaps the man who didn't know how to do withholding on his 1099 is up to identifying "systemic risk factors" in a global economy with billions of participants and trillions of transactions. Perhaps Sheila Bair can refocus away from her personality conflict with the CEO of Citigroup and onto the good of all mankind. Perhaps Summers, once liberated from his Faustian pact with the president, will stop placing his considerable gravitas behind lunatic ideas and finally listen to sane economics.
And perhaps Bernanke will not follow the example of his predecessor. Greenspan had created a gigantic liquidity bubble, and when it burst he faced a choice: Blame himself or blame the market. He chose the latter. A personal acolyte of Ayn Rand, the high priestess of libertarianism, was forced to "re-think" his "free market ideology." I guess changing your principles is less psychologically painful than admitting your failures.
But will Bernanke be any different? He has more than doubled the monetary base in the past year. When this bubble bursts, he will be forced to make the same choice. Who failed, Bernanke and his bank or the firms that he regulates?
This is a lot to expect from a bunch of GS-15s. (That refers to the government pay grade in which officials earn in the low six figures.) I suppose the gamble is that giving them enough power will make them better people.
But history suggests otherwise. The Financial Working Group, which called itself "The Committee to Save the World," got us into this mess under Bush. It proposed the original plan to purchase troubled assets, but then concluded that it wouldn't work and switched to direct investment, but passive only--and then Obama took over and started nationalizing firms. All the while, stocks dropped and the recession worsened. The Fed saw none of this coming--none of it--and they even resisted suggestions that they were causing it.
