MK wrote:
> Hi friends,
> I'm forwarding the following FT commentary by my liberal Representative
> here in Massachusetts and Democratic chair of the House financial
> services committee.
> Frank has been infuriatingly stubborn and arrogant on so many issues:
> from impeachment, ("I oppose it in principle"), to unflinching support
> of Israel, to ever-growing concerns with the dangerous radical-statists
> in power these last seven years ("next time, don't wait for the perfect
> Democrat to run for president"). Here he explains the economic
> philosophy of the 'other' business party we are given as U.S. voters.
> Aside from what I find as an absurd idea of a 'little-less'
> laissez-fair, I am curious whether the points he makes are sound and/or
> properly in context especially in light of some recent topics. I defer
> to the considerable expertise of other members of this list-serve who
> may have an opportunity to weigh in.
>
> Best,
> Maryellen in Massachusetts
> ------------------------------------------------
> Why America needs a little less laissez-faire
>
> Barney Frank
>
> Published: January 13 2008 19:19 | Last updated: January 13 2008 19:19
>
> As we prepare for this autumn’s election, the results are in on
> America’s 30-year experiment with radical economic deregulation. Income
> inequality has risen to levels not seen since the 1920s and the
> collapse of the unregulated portion of the mortgage and secondary
> markets threatens the health of the overall economy.
>
> These two economic failures will be major issues in the forthcoming
> presidential election, and, importantly, there is an emerging
> Democratic consensus standing in sharp contrast to the laisser faire
> Republican approach.
>
> There are two central elements of this consensus. Democrats believe
> that government’s role as regulator is essential in maintaining
> confidence in the integrity and fairness of markets, and we believe
> that economic growth alone is not enough to reverse unacceptable levels
> of income inequality. In the wake of the subprime mortgage crisis,
> credit markets round the world contracted sharply in response to
> concerns among market participants about the value of exotic and opaque
> securities being offered in largely unregulated secondary markets. This
> staggering implosion and its damaging and widespread reverberations
> make it clear that a mature capitalist economy is as likely to suffer
> from too little regulation as from too much.
>
> With respect to income inequality, since the end of the last recession
> – a period of steady economic growth – average earnings for the vast
> majority of workers have fallen in real terms. During this period,
> after-tax incomes of the top 1 per cent nearly doubled.
>
> Whether because of globalisation, technology or other factors, it is
> clear that market forces have produced too much inequality and
> government has not adequately used its capacity to mitigate the impact
> of these forces.
>
> Conservatives have long argued that government efforts to address these
> issues would damage the economy. They are, of course, the same people
> who predicted that there would be an economic disaster after Bill
> Clinton and the Democratic Congress raised marginal tax rates in 1993,
> and who opposed other tax increases on upper-income people. Economic
> growth in the ensuing years was among the strongest in the postwar era.
> It is now clear that growth in the private sector is consistent with a
> far greater variation in many aspects of public policy – including
> taxation and regulation – than conservatives claim. In fact,
> appropriate intervention with respect to prudential market regulation
> is necessary to promote growth, and its absence – as we have learned –
> can retard it.
>
> As recently as a year ago, one often heard the argument that US
> financial activity would migrate offshore unless we moved to further
> deregulate markets. There is little evidence to support this claim. In
> fact, it is now clear that what has been migrating to the rest of the
> world are the problems associated with securities based on bad loans –
> often originated by unregulated institutions in the US. Banks in the UK
> and Germany were forced to close, either as a result of holding large
> portfolios of these securities or because they could not roll over debt
> backed by them.
>
> Widespread securitisation, and use of the “originate to distribute”
> model, has turned out to be far less than the unmitigated boon it had
> once appeared.
>
> The market did its job with great efficiency in exploiting the benefits
> of securitisation but government failed to make good on its
> responsibilities. The failure of regulation to keep pace with
> innovation left us with no replacement for the discipline provided by
> the lender-borrower relationship that securitisation dissolves.
> Increasing and largely unregulated leverage multiplies the corrosive
> effect of this change.
>
> In response to the current crisis, it appears that the regulatory tide
> may, at long last, be turning.
>
> In 1994 a Democratic Congress – the last before the Republican takeover
> marked the arrival of the deregulators – passed the homeowners equity
> protection act, giving the Federal Reserve the power to regulate all
> home mortgage loans. The avatar of deregulation, Alan Greenspan, then
> Fed chairman, flatly refused to use any of that authority.
>
> In contrast, today’s Fed will soon issue rules using that authority.
> That represents a significant repudiation of the previous view. While
> the proposals made by the Democratic presidential candidates differ in
> detail, they are to a substantial extent consistent with the argument I
> have made here. Their Republican counterparts continue to advocate the
> hands-off approach pursued by the Bush administration. As a result, we
> are likely to have a healthy debate about the role of government in
> supporting a robust capitalist economy in the 21st century. It is
> important to note that this debate is not about policy details but
> represents fundamentally different views about the nature of our modern
> economy.
>
> I believe the American people will decide that we should enact policies
> that seek to curb growing inequality and provide some check on market
> excesses.
>
> The writer is Democratic chairman of the House financial services
> committee
>
> Copyright The Financial Times Limited 2008
>
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