A Most Surprising Week. More Are Coming.


I found myself occupied with other things this week which necessarily took me away from posting. Naturally, it turned out to be a hell of a week for news, so rather than allowing it all to pass without adding my two cents worth of opinion, I’ll take this opportunity to weigh in with my thoughts.

Scott Brown’s victory in the Massachusetts election set in motion a chain of events that have transformed the political landscape. Had you predicted just last week let alone a month or year ago that he or someone like him would win this election, that health care legislation would implode on the brink of passage, that the President would propose measures to significantly constrain the activities of the nation’s largest banks and that Ben Bernanke would be facing the possibility that the Senate would not confirm him for another term as Chairman of the Fed, you would have been considered a fool. Yet today, all of that is reality. Let’s take a look at these issues and a couple of others.

Health care legislation appears to be near death. On the surface, Brown’s election is being used as the excuse for not proceeding, yet I’m of the opinion that it simply provides a convenient reason for a number of elected representatives to run away from a bill that many realized was political suicide.

The public may have been on board with the idea of health care reform but they were never behind the 2,000 page monstrosity that came out of Congress. The provisions were incomprehensible to the general public and the deals that were cut with individual representatives, unions, insurance companies and other special interests in order to move it along simply confirmed their suspicions that what would emerge would be a system that worked to the benefit of the few funded by the taxpayer. The payoff for most was not discernible.

What’s striking about this failure is how much it resembles the failure of Hillary Care. Then as now, the effort at reform produced a technocratic set of proposals that stupefied most not intimately acquainted with the business of health care. Once again, the political class was seen as imposing sweeping change in an arrogant manner. Any attempt to reach out and educate was put aside as trite bromides were offered to justify the effort. As the average American watched this dance, the Uh-oh response came to represent their opinion.

So Scott Brown happened along, and had he not,  something else likely would have provided the politicians with a reason to run from this bill. The savvy ones  saw the signs, Massachusetts just provided a convenient reason to shift the discussion.

Which President Obama was only to willing to do. Enter our favorite octogenarian former Fed chairman, Paul Volcker. In a pivot that would make an NBA player jealous, the President came out fully in support of a plan to make the banks less risky. Ban them from engaging in proprietary trading, owning hedge funds and make them smaller — somehow. At the same time, make it a point to have the old man at your side and your economic team — Geithner and Summers — nowhere around.

Now, I’ve been an advocate of Volcker’s plan for some time. I recognize full well that prop trading and hedge funds weren’t the devils that almost brought down the financial system but at the same time, I see no reason why depository institutions need to engage in this sort of activity. There are lots of other ways for them to make money and the next time around, these activities might not be so innocent. More to the point, I am of the opinion that you can only manage so much and the behemoths of Wall Street are trying to keep too many balls in the air. Too big to fail is a problem that needs to be dealt with but too big to manage might be as much of a problem. That the financial crisis apparently took them all by surprise suggest that they can’t control the machines they’ve created.

I hope but don’t expect that the administration will cut the banks’ activities back. Congress has shown little real taste for any sort of meaningful reform and facing the need for cash in what will be a bruising mid-term election they are unlikely to offend the sources of that funding. At the same time, the financial industry has so far shown that they are experts at the influence game and there’s little reason to assume that they won’t beat back these proposals just as they seem to be beating back others.

Then we end the week with speculation that Bernanke might not be approved for a new term as Fed chairman. I tend to think that this is more media blather than actual reality, but these things do tend to take on a life of their own. For my money, the guy has done about a good a job as one could hope for. The meme that he should have done more to prick the bubble in housing ignores the fact that he wasn’t in charge during the critical points of its growth. He hasn’t been shy about pulling out all of the stops to keep the economy and financial system from imploding. How history judges him is anybody’s guess at this point in time but I don’t see a lot of upside in booting him out the door right now. I suspect that those who will vote yay or nay may side with the devil they know.

This is getting hopelessly long despite my attempts to keep it succinct. Let me leave you with a thought. A couple of weeks ago I wrote a post that questioned whether we were indeed in the throes of a recovery. Though I didn’t go into it there, I think that the events of the past week illustrate something important about the effects of significant economic upheavals. Specifically, that the political and social changes that accompany massive changes in peoples’ lives play out for some time after “recovery” might be underway.

In this context, we probably shouldn’t be too surprised by what transpired this week. In fact, we might well take it as a harbinger of bigger changes to come. The shock to which Americans have been subjected was and continues to be substantial. Only a fool would assume that there will not be consequences. The impact of Scott Brown’s election is just a taste of what might be coming down the pike.

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