Given recent debates around here on regulating the shadow banking sector, it was nice to see that the first thing Obama mentions in response to a question about why financial markets failed is an outdated "regulatory system that ... did not encompass the non-bank sector":
Transcript of Obama’s Interview With the Journal, Washington Wire: A transcript of The Journal’s interview with President Obama, which touches on financial-regulatory reform, the power of free markets, health care and Bernanke’s future at the Fed. ...
Question: Thank you for doing this, very much. ... Obviously a lot of things went wrong in the markets in the last year. Where do you think they failed?
THE PRESIDENT: Well, I think that there are some immediate and obvious culprits. We had a regulatory system that was outdated that did not encompass the non-bank sector. We had a securitization market that had separated borrowers and lenders and investors in ways that allowed everybody to take risks, with nobody feeling accountable or feeling their money was at stake. We had I think banks who were incented to boost their profits with some of these same risky financial instruments, and you didn’t have the kind of systemic oversight that would anticipate the enormous failures that could arise if any link in the chain broke. So that set of regulatory problems is what we are looking to solve in the proposals I’ll put forward tomorrow.
You then have, though, just to finish up, I think you’ve got a broader structural problem in our economy in which our last two recoveries had been based on bubbles, and a massively overleveraged consumer, a massively overleveraged corporate sector, and a financial system that didn’t have much restraint.
And so the question for us is how do we create the foundation for a more sustainable model of economic growth, one that doesn’t impinge on the dynamism of the free market, the innovative products that are critical and the entrepreneurship that creates jobs, but also recognizes that the levels of debt and a model that’s premised on an endless supply of foreign dollars is not one that is going to be sustainable over the long term. ...
Question: One of the things that you’re going to do this week that hasn’t gotten as much attention is try to directly regulate the consumer part of the financial system. ... What are you thinking there? Is there a danger of going too far? Why do consumers need that kind of help?
THE PRESIDENT: ... What we are saying is, number one, that we should have some common-sense protections around transparency, around full disclosure. Whether we’re talking about the mortgage market, credit cards, annuities — on a whole host of these financial instruments, in fact, people didn’t know what they were getting themselves into. And making sure that they are properly informed is I think the most market-friendly of regulatory approaches...
I think that the world has gotten more complicated. If suddenly you can, as a 20-year-old college student, sign for up for five different credit cards, if you find yourself able on a $30,000-a-year income to buy a $400,000 house with no money down, then you are much more vulnerable to the inducements that are out there than a generation ago.
Now, I know that some people would argue, well, people have to suffer the consequences when they make these bad decisions. The problem is, is that when you start seeing the entire housing market collapse because of foreclosures, or banks and other financial institutions requiring extraordinary support from taxpayers because they’ve greatly overextended themselves, this is not just a problem for one individual consumer; this is a problem for the economy as a whole.
Question: Does all that say to you that capitalism failed here somehow? The system needs to be changed, that there has to be some kind of a hybrid — capitalism and something else?
THE PRESIDENT: I am a firm believer in the power of the free market to allocate capital and produce goods and services, and ultimately wealth. I think the system is unsurpassed. But I think we’ve understood at least since the 1930s, ... that a sensible regulatory structure can ensure that the benefits of the free market are obtained without the risks of the system falling in on itself. And we just want to update that for a new environment in which you have things like credit default swaps. ...
I think the irony — and you wouldn’t know this from reading your publication’s editorial page — (laughter) — is that I actually would like to see a relatively light touch when it comes to the government. I think what I described in terms of financial regulation is typical, and that is set up so the rules of the road; ensure transparency and openness; guard against huge, systemic risks that will lead us potentially into — lead government potentially having to step in to avoid a depression; and then let entrepreneurs and individual businesses compete and do what they do.
And so it’s puzzling to me sometimes to hear the standard conservative critique of what we’re doing, when essentially every step we’re taking really involves cleaning up the mess that we found when we arrived here at 1600 Pennsylvania Avenue. ...
Question: Two quick questions on this, and then I’ll let you go. Ben Bernanke — you’ve obviously seen a lot of him. ... Inclined to reappoint him?
THE PRESIDENT: I think that Ben Bernanke has handled his position extraordinarily well under extraordinarily difficult circumstances, but I’m not going to make news on that right now.
Question: Okay. If you had your druthers, in the long run what would the top tax rate for the very richest Americans settle at?
THE PRESIDENT: Well, I think instinctively that the tax rates that existed for the top — for the very wealthiest Americans under Bill Clinton struck the right balance. ...
I do think that tackling tax reform, both on the individual side and on the corporate side at some point — akin to what was done in 1986, where you clear out some of the underbrush and you make sure that the base is broad, but everybody knows what it is that they’re paying and there aren’t a whole bunch of loopholes; there is serious enforcement and predictability — that kind of reform could end up generating the revenues that we need to run the basics of our government while actually in some cases lowering some rates. But that requires that everybody buy into a simpler, fairer system.
The one thing that I think is very important to understand is that there’s no free lunch, and sometimes politicians have been pretty irresponsible in saying you can have a prescription drug plan, you can have two wars, we can do a whole bunch of things, but we’re going to cut your taxes at the same time. And at some point something has to give.
He seems to get it, but what will the legislation look like in the end? I'm having a hard time imagining George Bush exhibiting the same depth of understanding of this issue, but he did seem to get the legislation he wanted. Somehow the Bushies would have sold financial reform as a patriotic duty to our troops. Or something like that.