Michael Hlinka: What Obama missed in his financial system overhaul
- June 18, 2009 8:39 AM |
- By Michael Hlinka
Money Talks is a business column from CBC radio.
By Michael Hlinka, CBC business columnist:
One of my favourite sayings is from the comic strip, Pogo: “We have met the Enemy and They is Us!”
Why do I like it so much? It’s a great reminder that it’s all too easy to blame other people for problems that are largely our own creation.
This phrase came to mind as I read the details of President Barack Obama’s plan to overhaul the financial system of the United States. The proposals are sweeping. There’s a populist appeal to many of them. However, when it’s all said and done, the package won’t do much to prevent the next crisis.
In fact, it could even lead to one.
When you read the document: “Financial Regulatory Reform – A New Foundation,” you can see where the wheels come off. It correctly identifies that rising asset prices, particularly in the housing market, hid weak underwriting standards. However, from there it concludes that it was gaps and weaknesses in the supervision and regulation of financial firms that prevented government from doing what needed to be done to protect the integrity of the financial system. As a result, the Obama plan would greatly expand regulatory authority and create lots of new bureaucracies.
What’s totally missing is the recognition of what caused the crisis in the first place - and that was too much, too cheap money.
In Canada, managing the money supply is the Bank of Canada’s responsibility. In the United States, that job falls to the Federal Reserve. During the early years of this decade – in the wake of the 9/11 attack – the Federal Reserve started slashing interest rates. The belief was that this would help the economy grow. For a time it looked like things the plan was working. The housing market was running on all cylinders and the stock market soared.
But we now know that this was all an illusion … the economy was inflating rather than growing. Then the over-borrowing in the system exaggerated the downswing, just as it did with the upswing.
There is nothing in the Obama plan that takes away the discretionary power of the Federal Reserve Board to increase the size of the money supply. Rather, the plan gives elected officials and bureaucrats even more latitude to act in what they deem “the public interest." This is what then-President George Bush argued when interest rates were pushed to absurdly low level of 1 per cent in July, 2003. (By the way, they now stand at one-quarter of 1 per cent.)
The enemy of sound long-term economic policy is short-term political considerations, which is why when I look at this political plan to “fix” the economy, I see the enemy looking back.
- Andrew Wahl (19)
- Andrew Willis (13)
- Bob LeDrew (10)
- Dan Noel (1)
- David Baskin (18)
- David Berman (1)
- David Colman (14)
- Deborah Yedlin (29)
- Duncan Stewart (29)
- Ellen Roseman (90)
- Jacqueline Drew (10)
- Jim Bray (25)
- Jim Jubak (6)
- John Gilchrist (4)
- Kelly VanBuskirk (6)
- Kira Vermond (73)
- Loraleigh Kovacik (9)
- Michael Hlinka (183)
- Peter Vincent (16)
- Pierre Battah (1)
- Todd Hirsch (1)
All News blogs
- Kira Vermond: Resolutions for Work
- New Year, new you. At least that's what you're shooting for in 2012 at your workplace. This is the year that you're going to ditch your wallflower ways, speak up in meetings and take the initiative.... Continue reading this post
- Ellen Roseman: Air Miles-Use them or lose them!
- If you're collecting Air Miles, you now have only five years to use them. And if you don't redeem in time, you'll lose them.... Continue reading this post