Even though the United States is in the middle of an "epic financial crisis," complained Paul Krugman on Monday, Clinton, Obama and McCain have failed to move the meltdown into "the center of election debate." Following which, Sen. Hillary Clinton immediately went to Philadelphia and gave what her campaign billed as a "major speech" on the economy.
It's a pretty good speech, though not likely to satisfy Krugman completely. Because while Clinton's speech provided many details on what she would do to address the foreclosure crisis currently sweeping America, she did not give the same amount of attention to the kind of full-scale regulatory reform that Krugman believes is necessary to beat some sense into our "out-of-control financial system."
Clinton's primary nod to Wall Street's troubles was to observe that if the Federal Reserve could assist in the JPMorgan purchase of Bear-Stearns by agreeing to insure against a possible $30 billion worth of Bear-Stearns defaults, then "the federal government should provide at least that much emergency assistance to help families and communities ..." who have been battered by the housing bust.
There's a gut level on which Clinton's focus makes perfect sense. Her position is based on the assumption "that our economic crisis is, at its core, a housing crisis." And there is no doubt that the collapse of the residential real estate sector is wreaking considerable damage on the welfare of millions of Americans and threatening to drag the entire economy into a deep recession. Nor is there any doubt that when campaigning in Pennsylvania, it makes far more political sense to tell voters what you are going to do to make their lives better in the short term, than it would be to talk about obtuse matters such as how Wall Street's infatuation with trading credit derivatives needs to be better regulated.
But the housing crisis is not the core of the problem -- it is a symptom. The housing boom would never have gotten so out of hand if it weren't for Wall Street's hunger to buy and trade complex financial instruments whose value was linked to mortgages. It's very easy to attack homeowners for taking out mortgages that they couldn't afford or mortgage lenders for refusing to do due diligence on their customers, and it is perfectly appropriate to come up with new rules that punish irresponsible or fraudulent behavior. But let's not ever forget who created the incentives that encouraged lenders to throw all the old rule books out the window. The real core of the problem, as Krugman and others have tirelessly pointed out, has been the rise of an essentially unregulated "shadow banking system" of hedge funds and investment banks that used borrowed money to bet without restraint wherever they saw the chance to turn a profit. If they hadn't been betting on collateralized debt obligations linked to mortgage-backed securities they would have found something else.
But tackling serious regulatory reform of the financial markets may be a bit of a touchy subject for Hillary Clinton. Because, as even as dedicated a partisan as Krugman will agree, "the Clinton administration went along too easily with moves to deregulate the financial industry." The trend line that got us where we are today started with Ronald Reagan, continued through the Clinton administration and reached its apotheosis in George W. Bush. To make financial reregulation a cornerstone of her campaign would invite a reinspection of the Clinton record on these matters.
Hillary Clinton may have inadvertently revealed this Achilles' heel in her economic platform when she declared in Philadelphia that she was proposing an "Emergency Working Group on Foreclosures," that "could be led by a distinguished, nonpartisan group of economic leaders like Alan Greenspan, Robert Rubin, Paul Volcker."
Robert Rubin is saying now that we need some new rules for Wall Street, but he sure wasn't making that case when he was secretary of the treasury under Clinton. And Alan Greenspan? The man whom history will likely hold most responsible for the contours of the current "epic" financial crisis? Please tell us you misspoke, Hillary!