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Business News/ Opinion / Online-views/  The theatre of US politics
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The theatre of US politics

The case for Republicans on fiscal deficit and on financial sector reforms remains rather weak whereas the case for Democrats remains weak on financial sector reforms

A file photo of Mitt Romney (left) and Barack Obama at the first presidential debate in Colorado. Photo: AFPPremium
A file photo of Mitt Romney (left) and Barack Obama at the first presidential debate in Colorado. Photo: AFP

Continuing the tradition of dispensing unsolicited advice, Bare Talk this week offers its unsought-for endorsement of its candidate for the next US president. It will be too late to do so in the next column. The US presidential election takes place on 6 November. The race is considered too close to call. The US economic health remains fragile. So far, the US economy has managed to avoid another recession since the previous one ended officially by June 2009 but only barely so.

To blame the sluggish recovery or non-recovery on President Barack Obama is unfair. The scale of the problem was far too daunting and, going by history, these deep systemic financial and economic crises accompanied by a credit bust leave their mark on the economy for a long time to come. Recovery is always slow and peak growth rates are not recaptured for a very long time, if at all.

If anything, President Obama could be blamed for not doing enough to reverse the financialization of the US economy that has been under way since the 1980s. That is to be blamed for both the crisis and the subsequent lacklustre recovery. He had a mandate for change and reform, but he wasted it.

The regulatory capture that was partly to blame for the crisis continues. Wall Street continues to resist and stymie reform efforts. Most legislative provisions of the Dodd-Frank Bill on reforming the financial sector are being watered down or are being abandoned. The Consumer Financial Protection Bureau is being rendered relatively toothless. The Volcker rule that sought to impose a ban on proprietary trading is being circumvented. Finally, the implementation of Basel III rules on capital adequacy of systemic financial institutions is being phased in over such a long period of time that it would be unable to prevent the next financial sector crisis and its systemic impact.

In fact, had President Obama pursued the above reform measures, the economy in the short term might have performed worse. That would have justified the need for a larger economic stimulus than what the US came up with. Economic restructuring and reforms on the one hand, and economic stimulus on the other, are not mutually exclusive. They complement each other. Policy stimulus will relieve short-term pain that reforms cause. There will be both intended and unintended losers of economic restructuring. The government has the obligation to indemnify and support unintended losers.

The choice between President Obama and governor Mitt Romney is presented as a choice between stimulus and entitlement vs economic restructuring and tough love. That is a bogus choice. One of our friends endorsed governor Romney because he had promised that he would seek the resignation of Ben Bernanke, the chairman of the Federal Reserve board. Bare Talk is not convinced that it constitutes necessary and sufficient reason to back Romney.

First, Bernanke is a Republican sympathizer and so was his predecessor, Alan Greenspan. Extreme and unconventional monetary policies were pursued under their watch to the detriment of the interests of segments of the American population that had nothing to do with the credit bubble, bust and the crisis. Republicans promise to cut the size of the government and talk often passionately about the bloated government. However, the government expanded in scope and fiscal deficit exploded under President Ronald Reagan and under President George Bush. Bill Clinton’s administration left fiscal surpluses as far as the eye could see and the Bush administration turned it into deficits into eternity. Hence, there is no guarantee that Romney would deliver on his promise to seek Bernanke’s resignation and even if he did, there is no guarantee that his successor would pursue a different set of policies. The interests of the American financial sector are closely intertwined with that of loose monetary policy even as it inflicts suffering on America’s old and savers and on the rest of the world.

When it comes to the financial sector, both the Democrats and Republicans have been guilty of mollycoddling it and of permitting regulatory and intellectual capture by the sector. The Commodity Futures Modernization Act, 2000, was led by Republican senator Phil Gramm, who went on to become the vice-chairman of the Swiss Bank UBS AG shortly afterwards. His wife Wendy Gramm headed the Commodities Futures Trading Commission (CFTC) from 1988 to 1993. Under her stewardship, CFTC exempted Enron Corp. from regulation of its energy trading activities. She then went on to serve in the board of Enron. Robert Rubin and Lawrence Summers, both belonging to the Democratic Party, resisted bringing over-the-counter derivatives within the ambit of CFTC. Clinton went along with that.

Hence, the case for Republicans on fiscal deficit and on financial sector reforms remains rather weak whereas the case for Democrats remains weak on financial sector reforms. If President Obama promised to drop treasury secretary Tim Geithner if he was re-elected and to work towards ending the umbilical cord between the Federal Reserve Bank of New York and Wall Street, then he would be less undeserving of a second term.

V. Anantha Nageswaran is the cofounderof Aavishkaar Venture Fund and Takshashila Institution.

To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk

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Published: 29 Oct 2012, 03:02 PM IST
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