Sunday, April 18, 2010

Obama means Business

The Securities Exchange Commission has filed charges against Goldman Sachs as the Obama administration has taken up regulatory reform of the financial markets. The two events are not unrelated. They reveal the percepton that the economy has turned the corner, and that the Obama administration is now ready to mean business, literally.

For a year now we have heard about the potential for a "double dip" in the economy. Fortunately, the conventional wisdom hasn't materialized. Wall Street has a way of swinging between extremes, between the ridiculous hubris that created the housing bubble (or the dot com bubble) and the abject despondency whenever a bubble is burst. If only businesses and investors could find the Aristotelian mean between irrational exhuberance and paranoid pessimism.

By most indices, the economy is on its way to recovery. The chances of a double dip on the economy are now so near zero that the Obama administration has switched mottos from "too big to fail" to "big enough to punish." For the fact is there is a cosy relationship between government and business, and a correlation between the Dow Jones and Gallup. Obama could not afford to regulate the big banks while the economy was spiralling out of control, but he and Geitner appear to think that the coast is now clear to do so.

It would appear that the SEC parts company with unregulated capitalism at the 11,000 mark. Last Friday, federal regulators filed fraud charges against Goldman Sachs over its dealings in subprime mortgages, precipitating a 125-point drop in the Down Jones. Consider the confidence of the SEC when these charges against Goldan Sachs occured in the middle of the day on Friday (and not at the start or end), and also at a time when options were expiring for the month (so investors who took out earlier plays on Goldman were left unable to hedge).

Meanwhile, a war is brewing between the two political parties about financial regulation and a bill coming out from the Senate Banking Committee which would, among other things, give federal regulators the authority and a $50 billion fund to control and wind down too-big-to-fail banks at imminent risk of destabilizing the wider economy. Republicans are pushing back hard against what they call "bailout authority" but their real beef is not with bailouts, which Democrats say that the fund would prevent, but the bill's provision to regulate financial derivatives: the instruments of mischief that led to last year's recession. This is at the heart of the bill, so important that President Obama has issued a (rare) veto threat against any bill that does not regulate what Warren Buffet calls "financial weapons of mass destruction."

Now that the market is stable enough to weather regulatory intrusion, Obama means business. With the health-care issue out of the way, regulating Wall Street has become Obama's next top priority. But this time, it will be easier. Because everyone - liberals and tea partiers alike - concedes that only big government can take on big business, this is ultimately going to be a winning issue for the administration.

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