He’s no FDR

DeLong skewers the the Stimulus Plan Claim via the Unemployment rate with stylized facts

With the release of financial regulation reform and healthcare reform that has Wall Street breaking open the bubbly, I just want to join the chorus of highly skeptical economists. The tune of the last few days is hard to miss. Take this piece from the NY Time’s Dealbook as an example: Only a Hint of Roosevelt in Financial Overhaul. There’s also Paul Krugman’s Op-Ed Column today Out of the Shadows which is the typical on-the-one-hand-on-the-other hand economist behavior. (Could I just mention in passing that I like the OLD Paul better? The one that was an out spoken advocate for liberal economists? I’m not sure what happened at that White House Dinner, but I’m beginning to think we now have a Manchurian economist at Princeton. Oh, where is our Shrill One?) Oh, and you can still read my first impressions here. I’m going to start with Financial Reform but don’t leave me yet. Brad deLong takes on Christine Romer’s The Lessons of 1937 at The Economist and since he still hasn’t been invited to dinner at the White House, it’s classic Brad.

So what does Krugman think about the Alphabet Soup Agency reheat slugging its way through that perpetual Hall of Wall Street minions we know as our Congress? He believes that it throws some light on the shadow banking industry in that the Alphabet Soup gang at the FED get to see more balance sheets and books. There is also a stab at standardizing the process, but custom fitted Credit Default Swaps remain. The essential riskiness remains. Let’s examine the Krugman critique.

But what about the broader problem of financial excess?

President Obama’s speech outlining the financial plan described the underlying problem very well. Wall Street developed a “culture of irresponsibility,” the president said. Lenders didn’t hold on to their loans, but instead sold them off to be repackaged into securities, which in turn were sold to investors who didn’t understand what they were buying. “Meanwhile,” he said, “executive compensation — unmoored from long-term performance or even reality — rewarded recklessness rather than responsibility.”

Unfortunately, the plan as released doesn’t live up to the diagnosis.

Well, maybe the White House Pastry chef did not completely overwhelm the shrill one.

Tellingly, the administration’s executive summary of its proposals highlights “compensation practices” as a key cause of the crisis, but then fails to say anything about addressing those practices. The long-form version says more, but what it says — “Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value” — is a description of what should happen, rather than a plan to make it happen.

Furthermore, the plan says very little of substance about reforming the rating agencies, whose willingness to give a seal of approval to dubious securities played an important role in creating the mess we’re in.

In short, Mr. Obama has a clear vision of what went wrong, but aside from regulating shadow banking — no small thing, to be sure — his plan basically punts on the question of how to keep it from happening all over again, pushing the hard decisions off to future regulators.

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