Clinton and Obama Speeches on the Economy

  Conventional wisdom repeated often enough gets mistaken for truth--take for example the hoary old chestnut that Clinton and Obama offer almost the same proposals. Well, I've gone through their speeches addressing the economic fallout from the subprime mortgage mess which has metastasized into widespread financial market meltdown, and found distinct differences in approach and emphasis.

It's true that both candidates support passage of the Dodd-Frank bill (more here). But in terms of their identification of solutions, the two differ widely.

First a summary of each candidate's speech, then a discussion of the differences.

Major points of Clinton's speech, delivered at University of Pennsylvania, in Philadelphia, PA on March 24, 2008, transcript here:

1. "...the Federal Housing Administration should also stand ready to be a temporary buyer - to purchase, restructure, and resell underwater mortgages."
2. "I’m proposing an Emergency Working Group on Foreclosures. It could be led by a distinguished, non-partisan group of economic leaders like Alan Greenspan, Robert Rubin, Paul Volcker....The group’s first order of business would be to determine how the government should implement the solutions proposed in the Frank-Dodd legislation - and whether this legislation goes far enough...The group would report back to Congress on a very tight timeline - no more than three weeks....we should implement the moratorium on foreclosures that I first called for in December."
3. "...a one-time emergency $30 billion fund that would go directly to cities and states to address the housing crisis. This money could be used to purchase foreclosed or distressed properties, which cities and states could then resell to low-income families or convert into affordable rental housing."
4. "...passing new legislation to clarify legal liability for mortgage companies that act to help more borrowers stay in their homes."

Extras mentioned by Clinton:

... [supports creation of a] Carbon Reduction Mortgage Association" or a 'Connie Mae' - an idea that Vice President Gore first came up with. We’d direct Fannie Mae and Freddie Mac to provide loans to help people build more and retrofit more energy efficient homes.

Major points of Obama's speech, given at Cooper Union in Manhattan, NY, March 27, 2008, transcript here:

1. "...if you can borrow from the government, you should be subject to government oversight and supervision....at the very least, these new regulations should include liquidity and capital requirements."
2. "...general reform of the requirements to which all regulated financial institutions are subjected....As we reform our regulatory system at home, we should work with international arrangements, like the Basel Committee on Banking Supervision, the International Accounting Standards Board, and the Financial Stability Forum, to address the same problems abroad."
3. "...we need to streamline a framework of overlapping and competing regulatory agencies....Different institutions compete in multiple markets. Our regulatory system should not pretend otherwise. A streamlined system will provide better oversight and be less costly for regulated institutions."
4. "...we need to regulate institutions for what they do, not what they are....it makes no sense for the Fed to tighten mortgage guidelines for banks when two-thirds of subprime mortgages don't originate from banks."
5. "we must remain vigilant and crack down on trading activity that crosses the line to market manipulation. On recent days, reports have circulated that some traders may have intentionally spread rumors that Bear Stearns was in financial distress while making market bets against the country."
6. "...we should create a financial market oversight commission, which would meet regularly and provide advice to the president, Congress and regulators on the state of our financial markets and the risks that face them. These experts' views could help anticipate risks before they erupt into a crisis."

Extras mentioned by Obama:

It's time to realign incentives and the compensation packages so that both high-level executives and employees better serve the interests of shareholders. ...For supervisory agencies, oversight has to keep pace with innovation.

I have laid out far-reaching plans that I intend to sign into law as president to bring transparency to government and to end the revolving door between industries and the federal agencies that oversee them.

A Comparison of the Two

The business press has followed candidates closely; Business Week has reviewed Clinton's speech and discussed all three candidates' plans. But Clinton's emphasis is on helping homeowners in the near term which has much to do with her bid for more votes in upcoming primaries. Obama's emphasis is on letting Wall Street know its days of slack regulation will end if he's elected.

Clinton is correct to rush aid to homeowners, many who were subject to predatory lending practices, but the sweep of her plan may get tangled in issues of moral hazard, or rewarding the imprudent/foolhardy/greedy. (I believe it's strong sentiment against unscrupulous "flippers" and homeowners who used their homes as ATM machines that fuels outcries from renters who oppose an "unfair" government bailout of homeowners; McCain's "do nothing" stance speaks to this outraged part of the populace.) Her plans all address the economy from the vantage point of the working person, shored up by her follow-up speech on job creation and re-training, also given in Pennsylvania just yesterday. As detailed and concerned for the everyday homeowner as her proposals are, I think in focusing on voters' immediate concerns, her plans miss a crucial point--the source of the current economic crisis is not house-flipping homeowners, it's a financial services industry that went hog-wild inventing new securities, then flogged them all around the world, and ginned up new mortgage products to push all the way down the line to mortgage brokers and ultimately on homeowners. The fallout lies with the taxpayer, but the cause doesn't.

Obama also provides some aid to homeowners who are upside down on their mortgages due to falling home values. But he also proposes solutions that address the root cause of our current economic crisis: re-regulating, as only the federal government can, runaway markets offering flimflam product. Unregulated, shoddy, highly speculative product ultimately harms the high-flying investor and the everyday homeowner. The timing is good for the message: Wall Street has shown that it needs the Federal Reserve and it's only fair if you take a bailout that you also submit to the regulations that protect both consumers and the industry.

Both Obama and Clinton visited Manhattan to show that if they both accept campaign money from Wall Street sources, that they're both capable of biting the hand that feeds.

When Clinton went to Wall Street (to the NASDAQ) in December of 2007 to make her position known, this is what she said (from her March 24 speech):

So I went to New York City and I told Wall Street they needed to do their part to address this crisis. I put forward an aggressive plan for a 90-day moratorium on all subprime foreclosures and a voluntary five-year freeze on interest rates for all subprime mortgages.

Yet Clinton acknowledges in that same speech, quite early on, that "What started out as a subprime mortgage crisis has now become a national credit crisis, rippling out from banks and boardrooms to businesses and living rooms across America." For various reasons, her emphasis is the impact on homeowners--even in December, 2007, the threat to regulate the financial services industry seems to be secondary to the primary goal of addressing the subprime situation.

So far, slight differences in emphasis between the two.

The most important difference between the two speeches is this: Obama's speech exposed the legislative problem that enabled our current crisis: the repeal of the Glass Steagall Act of 1933 and its replacement with the Gramm-Leach-Bliley Act of 1999, signed into law by then-president Bill Clinton.

If the Glass-Steagall Act of 1933 sounds vaguely familiar to our regular MOMocrats readers, it's because our own Kady (Loaded Dice) brought it up in a post just over a week ago when Bear Stearns got its Federal Reserve credit line of $30 billion. Remember that? (Of course, about a dozen other Weapons of Mass Distraction have blown through town since then, each one demanding! our! attention!)

Is it "only" politics for Obama to bring up and lay at former President Bill Clinton's door the repeal of Glass-Steagall? Or is there something more to its mention?

Glass-Steagall Act, 1933

Forbes' Investopedia has some historical background on the Glass-Steagall Act (GSA) of 1933, as well as its repeal in 1999 here. GSA's purpose?

The GSA set up a regulatory firewall between commercial and investment bank activities, both of which were curbed and controlled...Bank Holding Company Act (1956) further separated financial activities by creating a wall between insurance and banking. Even though banks could, and can still can, sell insurance and insurance products, underwriting insurance was forbidden.

Translated into Poets Who Skipped Econ 101, I understand this to mean that when banks offer too many speculative financial products, they become overextended by leveraging depositors' funds at too high a ratio relative to the debt owed. So if there's ever a crisis of consumer confidence (or by other investors, as was the case with Bear Stearns) and depositors seek to liquidate their principal, it causes a bank run.

Banks busy dabbling in speculative securities, as many did prior to 1933, don't have enough cash on hand to pay out the principal they received from depositors plus interest they owe to their customers--hence the situation confronting investment firm Bear Stearns. (BTW, GSA is also the act that established Federal Deposit Credit Insurance--FDIC, or what guarantees your savings deposits up to $100,000, among other things--because in the wake of numerous bank failures in the 1929-1933 period, bank runs proved the ruin of individuals as well as businesses and helped drive the economy deeper into the Great Depression.) Glass-Steagall, as I understand it from a layperson's point of view, separated out the riskier financial instruments from the kind of business banks could engage in for the protection of the consumer and the industry.

Want to know who's responsible for repealing Glass-Steagall, which happened in 1999 under Bill Clinton's watch? Well, the Forbes Investopedia gives us the names right on the bill: the "Gramm-Leach-Bliley Act, which eliminated the GSA restrictions against affiliations between commercial and investment banks." Gramm-Leach-Bliley, as I understand it, returned us to the days when there was no line between banks and investment firms. And predictably, just as had happened in the 1930s, there was insufficient liquidity to keep everything afloat.

The Big Picture vs. Details

Our economic picture is so complex, people on Wall Street have difficulty explaining it and certainly lawmakers and others will be wrestling with different facets for some time.

Obama's chosen to highlight regulation and soft-pedal aid to homeowners for now. This could be to his detriment; he's already viewed as giving good hifalutin', but not necessarily good on bread and butter.

On the other hand, Clinton's push for immediate aid to homeowners is both commendable in its concern, pragmatic in its need to appeal to voters, and also has some pitfalls. Will her approach trigger the "moral hazard" tripwire that could lead to backlash against her well-intentioned proposals? Plenty of people are in trouble--but plenty of people did not participate in the orgy of at times reckless home-buying and resent having to bail out the less responsible.

And finally, another perspective on Clinton: did she lack the ability to discern how disastrous Gramm-Leach-Bliley was/is? I doubt it, as she's an uber-wonk of the highest order. Or is she somewhat hamstrung by the fact that she'd have to criticize her husband's administration? I tend to think the latter is true.

Maybe this is what people mean when they use shorthand to say "no more Bush-Clinton-Bush-Clinton." Yes, they're rightfully wary of an anti-democratic dynasty. But they're also cognizant that for Senator Clinton to truly do what's best for the American people, she'd have to repudiate or severely criticize much of what went on during her husband's administration.

Look at the problems she's having with NAFTA: was she instrumental in arguing for its passage or was that something she played no part in and can therefore criticize with integrity to the Ohio and Pennsylvania voters that NAFTA left behind? This is why her "two-for-the-price-of-one" strategy is double-edged--the 8 years of experience as First Lady depends on an uncritical embrace of everything the Clinton years 1992-2000 accomplished. Much of that was good, but not all of it was. She says she's a fighter, but when it comes to fixing problems that came out of the Bill Clinton years, does she pull punches?

In any case, the handicap of not being able to differentiate herself from the Bill Clinton presidency can, at times, produce shallow policy pronouncements, or at least proposals with big blind spots. Case in point, her proposals to address the subprime mortgage fallout. Where is Glass-Steagall or Gramm-Leach-Bliley in Clinton's analysis of the situation, or her solutions for it? How will she solve the credit crunch she says is also part of the economic crisis? I'm genuinely excited by her mention of Gore's "Connie Mae" proposal, but don't see how money to boost ecologically sound construction or retrofitting of houses is anything more than a band-aid solution to an economic crisis that started in the housing industry and has metastatsized into much, much more.

Obama, while not perfect, at least has the legitimacy required to make critiques and suggest solutions that are bipartisan in nature when problems stem from the past several administrations. With regulation of banks and investment firms, and ongoing scrutiny of the products they offer that he proposes, we can address as they arise the subprime fallout and frozen credit, plus whatever other ugly surprises are still lurking in the bond markets or other parts of Wall Street. He also proposes to blast some welcome sunshine on the dealings of lobbyists and legislators who accept their funds.

I don't know about you, but I don't want to have to bail out Wall Street AGAIN the next time some numbers whiz kid thinks up a new, though sketchy, way to make piles of money. And I REALLY don't care for lobbyists ghostwriting self-serving bills (such as Gramm-Leach-Bliley) that need taxpayer bailouts. So the best solution, to me, looks like a systemic overhaul of Wall Street regulation and the access lobbyists have to legislators--both of which are part of Obama's platform.

Take-Aways

Instead of watching the sky fall, maybe we voters can ask our representatives to repeal Gramm-Leach-Bliley and bring back a revised Glass-Steagall. It's something we can all do now, instead of waiting for the changing of the guard.

As for the guys behind the ruinous bill that helped bring us into our current mess, I'd say, throw the bums out of office, but all three are retired. Oh, and former Senator Gramm, currently vice-chairman of UBS bank? He's also now the "economic brain" and rumored running mate of one Senator John "Bomb-Bomb" McCain. Yikes. Another reason not to vote for McCain, as if you needed another.

Photo credits: candidates, NYT; Phil Gramm, US Senate; stockvault and stockxchng for all others; "no sale" cash register, http://www.sxc.hu/profile/bjearwicke.

Cynematic keeps her nest egg safely stowed in the Bank of Sealy Mattress and in the coffee can buried somewhere in her back yard. If only she could remember where. Her personal blog is P i l l o w b o o k.

Comments

[Julie Pippert]

Oh excellent summary, thanks. I am also very glad to have someone else observe that there are differences. I'd missed the Gramm gossip, and will look into your suggestion for our reps.

[Amy@UWM]

Great, analysis. Fascinating insight into how the former Clinton administration can limit a new one. Also love that this post shows that Obama does have substance and proposes solutions that get to the heart of the matter rather than simply being a "Hillary-lite."

[PunditMom]

I find neither very encouraging. And, as a former regulator, I have to say Obama's suggestions are nice, but the SEC and others have been working for a long time to make the regulatory framework one that can handle these issues. And lawmakers do their best to prevent that. This is one of the reason's I think Obama is very naive about what can be accomplished on this front.

[cynematic]

Glad some of you found the piece insightful. I looked pretty hard for anything Clinton had to say on GLBA 1999, but didn't have the time or expertise to dig into her proposed legislation on the subprime meltdown. But overall, I do believe that it's ticklish for her to come out against something that's part of Bill's legacy as president. Can we really afford to give those years a pass?

PunditMom, wish you'd post on the speeches (or at least Obama's and the new proposals Paulson etc just came out with) because I'd love to hear a former regulator's perspective on all of this! As I read in one news report, NYT I think, Paulson's suggested changes to the regulatory system would leave the SEC weaker than status quo and merge it with another regulatory agency: http://www.nytimes.com/2008/03/29/business/29regulate.html

My initial reaction: great to re-organize, but if there's less teeth to the agencies as a result, then what's the point?