The Democrats Strangle Finance - and Jobs

I have two related new pieces - one at em>The Week< and one on American Public Media's "Marketplace" - about the likely economic effects of the Obama administration's proposed financial reforms. It's a case of refusing to lock the barn door even after the horse has bolted: instead of addressing the causes of the housing bubble, the administration wants more policing powers generally so that bubbles will never, ever occur again. (The details of the failure to address housing are in the "Marketplace" item; the details on the powers sought instead can be read in the piece in The Week.) But bubbles are unpreventable - in large part because nobody knows until it is too late which rises in asset prices are justified and which are not. And then when it is too late, popping the bubble is just as scary and dangerous as the inevitable crash. It becomes, to borrow a phrase from John Kenneth Galbraith like committing suicide for fear of death. The more probable effect of the reforms will be the hampering impact on financial innovation.

Some Obama administration supporters yearn for the "boring finance" of the postwar years. But those were also years when the U.S. economy was dominated by giant oligopolistic firms that financed themselves out of retained earnings—a regime tough on newcomers with no earnings to retain.

Such a regime will have important negative real world economic effects.

There was a saying in Silicon Valley in the 1990s: "The thing that makes America the greatest country on earth is that it is the only place where you can borrow $100 million without owning a suit." Borrowing even fifty dollars is a lot tougher these days than a decade ago, suit or no suit. But as the U.S. economy struggles to recover, we all have an interest in preserving the innovation, dynamism, flexibility and creativity of the financial sector.

As is, we are threatened with a future in which new products, new wealth and new jobs arrive more slowly. Which in turn may have important real world political effects.

Maybe the high costs of state control are a lesson that must be relearned in every generation. As the new policies go into effect and do their harm, there will be a great relearning among young voters entering the workforce after 2010. And just as today's college students rallied to Barack Obama's language of change—so perhaps will today's high school students someday rally to a conservative who can re-articulate the free market's exciting offer of hope, growth, and opportunity.