...for investors, it's another story
Derek DeCloet
Globe and Mail
Politics, the 19th-century politician Otto von Bismarck said, is the art of the possible. If he were alive today, in the age of television and instantaneous news, he might add: it's also the art of illusion.
Barack Obama, no surprise, is a master at it, a fact he proved this week in his latest blitzkrieg on Wall Street. In announcing his proposal to remake America's banks by limiting their activities and the risks they can take, the U.S. President adopted his preferred storyline for the financial crisis.
He spun it well: Everything was going along quite nicely in the economy, you see, until bankers went on “a binge of irresponsibility,” taking “reckless risks in pursuit of quick profits and massive bonuses.” This, of course, led them to ruin by 2008, at which point the hard-working, God-fearing American people – “who were already struggling in their own right” – reluctantly bailed them out to prevent the economy from going up in smoke.
And what did the banks do to thank them? They sent an “army of industry lobbyists” to Washington to “block basic and common sense rules,” to explain why they “can't keep credit card rates low,” and to defend their “obscene bonuses.” After which, said lobbyists presumably returned home on their private aircraft, where they were served fried puppy for dinner by their personal chefs.
For the average American, this is an appealing story: Hey, it's all someone else's fault! But that's something of a fairy tale. The truth doesn't fit such a tidy narrative.
Who's really to blame for the terrible shape of the U.S. financial industry? Well, sure, Wall Street executives did their part. “Binge of irresponsibility”? Guilty as charged.
But also to blame are millions of people who overspent their incomes, who bought homes far beyond their means, who accepted teaser-rate mortgages while giving little thought to – or, worse, being willfully blind to – what their payments would be when the interest rate jumped. And also on the list of culprits: many of the same people and government institutions now proposing measures to stop it from happening again.
Bear Stearns and Lehman Brothers, who would be the evil twins of the saga if Fannie Mae and Freddie Mac hadn't already claimed the title, collapsed under the weight of bad debts and collapsing property values. But real estate prices wouldn't have been so overheated if not for the Federal Reserve's epic mistake of allowing crisis-level low interest rates to linger in 2003 and 2004, when there was no crisis to be seen.
Alan Greenspan was the chairman of the Federal Open Market Committee, the group that sets the central bank's rates. The vice-chairman for part of this period was Timothy Geithner, now Mr. Obama's treasury secretary.
And what of the risks the bankers took? True – and they were helped mightily by the Securities and Exchange Commission, which in 2004 chose to loosen the restraints on how much debt investment banks could take on, allowing them to sink deeper into mortgage-backed securities. The cancerous growth of Fannie and Freddie was hardly a state secret; it was practically government policy. Washington kept raising the limit on the size of the mortgages they could purchase in order to grease the wheels of the real estate market. Which party was the “reckless” one here?
In the long run, of course, the history of the crisis matters less than what the United States does to repair its broken banking system. America, for all of its woes, still represents one-quarter of the world's economy, 30 per cent of stock market capitalization, and is the home to three of the 10 largest financial institutions. China, despite boasting three megabanks and an improbable growth rate, does not even come close in financial heft.
So the real importance of Mr. Obama's move on the banks is not the overblown rhetoric – that's just for the campaign ads – nor the substance of this week's proposals, which were so vague as to be almost meaningless (and can't be implemented without the approval of Congress). It's the uncertainty that comes with having a president who lately appears motivated almost by vengeance. (The suddenly-precarious future of Fed chairman Ben Bernanke, whose term expires on Jan. 31, only adds to the anxiety.)
The war on Wall Street wasn't the only reason the Dow Jones industrial average had its worst week since last March, dropping 4.1 per cent. But it was a big contributor. American voters may like what Mr. Obama is telling them, but for investors, it's another story.
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