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Source link: http://archive.mises.org/9028/obamas-economic-team-more-of-the-wrong-people/

Obama’s Economic Team: More of the Wrong People

November 28, 2008 by

President-elect Obama has announced that Paul Volker will head a new Economic Recovery Advisory Board that will propose interventionist policies to bring about economic recovery from the recession.

At the same time, Obama announced that University of Chicago economist, Austan Goolsbee, wil head the staff of this new advisory board.

Goolsbee believes that incentives matter, and because of this he believes that goverment can, therefore, manipulate tax rates and market prices (through various fiscal and regulatory tools) to get people to act more along the lines the policy-makers would like.

One form of intervention that Goolsbee favored was extending mortgage loans to the the uncredit worthy. In a March 29, 2007 op-ed for “The New York Times,” he said that it was good that financial institutions were being prodded to lend money to those who would not meet normal standards for home loans.

Why? Because people should be evaluated on the basis of what their future income is likely to be in deciding whether or not they can offord to buy a house and meet the monthly payments, not their present income status.

Banks and other lending institutions were clearly misjudging who, therefore, was a “good risk” by only looking at someone’s ability to make a reasonable downpayment and meet those montly payments today.

Thus, Goolsbee was delighted that political and regulatory tools were being used to get those uncredit worthy into new homes. The private sector was not thinking far enough ahead, and that’s what the government needed to get them to do, Goolsbee said.

Well, we have now seen the future that Goolsbee was counting on, and it has turned out to be a disaster. Cheap, easy money policies supplied the Fed- created credit to feed the housing frenzy so many of those who Goolsbee want to get a house were able to become “home owners.”

So here we are. One of the economic “experts” who praised the misguided policies that generated the housing bubble now is to be a leading “player” is supposedly getting us out of the current economic crisis.

This another “footprint” telling us where Obama’s “journey of discovery” is likely to be taking us.

Richard Ebeling

{ 16 comments }

Arend November 28, 2008 at 10:11 am

Scientism for the win! Social Engineering for the win! Oh civilization where art thou? The demise of the Chicago School for the win so the more radical Keynesians can take over after Obama’s first term.

It’s almost hilarious how Obama is going to do all the wrong things for all the wrong reasons. Hopefully he takes the Chicagoite ideology with him into the abyss.

Fephisto November 28, 2008 at 10:48 am

“Hopefully he takes the Chicagoite ideology with him into the abyss.”

And then the media will say, “This is proof Capitalism has failed.”

This twisting of words and ideologies really ****es me off.

Pat November 28, 2008 at 11:15 am

It seems to me the large public has lost any understanding of what capitalism or even socialism are. Therefore, you get the let’s blame free-market capitalism crowd even though you could see that wasn’t the system we have in place in the world, let alone in the US (At least, in its pure form).

William Rader November 28, 2008 at 1:11 pm

I have my copy of Henry Hazlitt’s Man vs. the Welfare State at hand. However, given the completely illogical decisions that Obama is making in terms of cabinet appointees, I am wondering if even the wisdom of Henry Hazlitt will be enough to guide me through what I sense is the rapidly approaching economic “end time!” I have to agree with those people who think that only an economic catastrophe of massive proportions will change US fiscal policy. At some point, Obama simply won’t be employ his fallback on the failures of the Bush policy.

C (The Forgotten Man) November 28, 2008 at 2:36 pm

Shall we trade Greenspanese for Volckerese?

Volcker is credited with stopping the stagflation of the ’70′s by reining in the Fed when he was made chairman by Carter. Yet he continues to spout a mix of sensible “free market” slogans that almost suggests some understanding of Austrian principles, and in the next breath blaming “irrational exuberance and pessimism” of investors and talking about regulating and monetary manipulations as the way to fix things.

Here is how Herr Volcker explained the current crisis last spring:

The Economic Club of New York – Paul A. Volcker – April 8, 2008

…the bright new financial system – for all its talented participants, for all its
rich rewards – has failed the test of the market place. To meet the challenge, the Federal Reserve
judged it necessary to take actions that extend to the very edge of its lawful and implied powers,
transcending certain long embedded central banking principles and practices. The extension of
lending directly to non-banking financial institutions – while under the authority of nominally
“temporary” emergency powers – will surely be interpreted as an implied promise of similar
action in times of future turmoil. What appears to be in substance a direct transfer of mortgage
and mortgage-backed securities of questionable pedigree from an investment bank to the Federal
Reserve seems to test the time honored central bank mantra in time of crisis — “lend freely at
high rates against good collateral” — to the point of no return.

The implications of these decisions, and the lessons from the unfolding crisis itself,
surely deserve full debate and legislative review in the period ahead. It is certainly right that in
this instance, the Federal Reserve acted with full support of the Secretary of the Treasury. In
their technical details, the issues are terribly complicated. That is true in large part because of the mind-bending complexity of the world of derivatives and securitization. There are also cross-
cutting bureaucratic and political concerns – political concerns at the high level of the proper use and allocation of government power and at the low level of embedded economic interests.

In sum, it all adds up to a clarion call for an effective response.

Before turning to the specifics of the needed debate, I want to emphasize that we are not
dealing simply with problems of financial structure and regulation, of repairing or papering over
weak links in markets, or of realigning supervisory responsibilities. Financial crises typically
emerge after a self-reinforcing process of market exuberance marked by too much lending and
too much borrowing, which in turn develop in response to underlying economic imbalances…

[and then]

Mathematical modeling, drawing strong inferences from the past, has demonstrably failed
to anticipate unexpected events of potentially seismic importance. The commonly cited “two
sigma” or “once in a 50 years” event has materialized too frequently to validate that approach.
Part of the problem, as I understand it, is that mathematical modeling simply cannot deal with
markets where it is not random or physically determined events but human instincts that cause
self-perpetuating waves of unwarranted optimism or pessimism.

The combination of herd behavior, opaque loan characteristics, and breakdowns of
market function at times of crisis has also raised important questions about the characteristics
and usefulness of “mark-to-market” accounting, particularly its extension in uncertain and
illiquid markets to what is euphemistically known as “fair value” accounting. That is too
complicated a subject for me to linger on today. Suffice it to say there cannot be much doubt that
“mark-to-market” is an essential discipline for trading operations, hedge funds and other thinly
capitalized financial firms. What is at issue is the extent to which it is suitable for regulated,
more highly capitalized intermediaries, including commercial banks. Their ongoing customer
relationships, the value of which is not automatically correlated with reversible swings in market
interest rates, cannot be easily reduced to a market price or a mathematical model.

[and]

The recitation of particular market vulnerabilities, of supervisory lapses, of failure to
close gaps or end disagreements among regulators is not surprising. In the United States,
informed observers, market participants, officials themselves have long been aware of
fragmented responsibilities, competing and overlapping institutional objectives, and ingrained
resistance to change. Established agencies haven’t been able to keep up with all the complexities.
The drumbeat of lobbying pressure has not been for more effective supervision; to the contrary,
it’s been fear of allegedly heavy handed and intrusive official intervention damaging to the
competitive position of institutions operating in international markets.

Perhaps most insidious of all in discouraging discipline has been pervasive compensation
practices. In the name of properly aligning incentives, there are enormous rewards for successful
trades and deals and for loan originators. The mantra of aligning incentives seems to be lost in
the failure to impose symmetrical losses – or frequently any loss at all – when failures ensue. The
point has been made time and again, yet, with rare exceptions, compensation committees and
their consultant acolytes seem unable to break the pattern. That may not be an area that law or
regulation can, or should, deal with effectively. Surely it is a matter for the leadership of large
institutions, particularly those sheltered by official support….

[and]

The recitation of particular market vulnerabilities, of supervisory lapses, of failure to
close gaps or end disagreements among regulators is not surprising. In the United States,
informed observers, market participants, officials themselves have long been aware of
fragmented responsibilities, competing and overlapping institutional objectives, and ingrained
resistance to change. Established agencies haven’t been able to keep up with all the complexities.
The drumbeat of lobbying pressure has not been for more effective supervision; to the contrary,
it’s been fear of allegedly heavy handed and intrusive official intervention damaging to the
competitive position of institutions operating in international markets.

Perhaps most insidious of all in discouraging discipline has been pervasive compensation
practices. In the name of properly aligning incentives, there are enormous rewards for successful
trades and deals and for loan originators. The mantra of aligning incentives seems to be lost in
the failure to impose symmetrical losses – or frequently any loss at all – when failures ensue. The
point has been made time and again, yet, with rare exceptions, compensation committees and
their consultant acolytes seem unable to break the pattern. That may not be an area that law or
regulation can, or should, deal with effectively. Surely it is a matter for the leadership of large
institutions, particularly those sheltered by official support.

[and finally...]

In dealing with the challenge, a number of points seem to be of fundamental importance:
.
- The role of the Federal Reserve as lender of last resort and as regulator does
need clarification. Those functions are inextricably linked to the extent
particular institutions are protected by borrowing privileges. The plain
implication of recent actions is that in time of stress investment banks deemed
of systemic importance are to be so privileged. Unless the Fed’s initiative can
somehow be contained to a single aberrant incident – which seems quite
unlikely – a direct responsibility for oversight and regulation follows. I do not
see how that responsibility can be turned on only at times of turmoil – in
effect when the horse has left the barn.

- If the Federal Reserve is also to range further, to have clear authority to carry
effective “umbrella” oversight of the financial system, internal reorganization
will be essential. Fostering the safety and stability of the financial system
would be a heavy responsibility paralleling that of monetary policy itself.
Providing direction and continuity will require clear lines of accountability
(running, for instance, to the Vice Chairman of the Board and to relevant
Reserve Bank Presidents), all backed by a stronger, larger, highly experienced
and reasonably compensated professional staff.

- A case can be made for consolidating all supervisory and regulatory
responsibilities for “safety and soundness” into a single “super agency”.
While starkly contrary to the American tradition of more specialized agencies,
it is the path taken by the U.K. and a number of other countries to assure
consistent effective coverage. However, as recent U.K. experience
emphasizes, close liaison and cooperation with the central bank would be
absolutely essential for anticipating and managing crises.

- No one will benefit from regulation and supervision which is unduly intrusive
and arbitrary. Venture capital and equity funds have been two successful,
creative and valuable parts of American capital markets. By their nature, they
are dependent on strong and sophisticated investors, so systemic implications
of failure of particular funds is unlikely. Consequently the case for either
official liquidity support or direct regulatory intrusion is weak.

Just what exactly did he say? He wants the Fed to become the “super-agency” uber-regulator? The economic Gestapo?

Jaun November 28, 2008 at 3:09 pm

Mr. Obama and his economic “scheme team” are on the road to aristocracy, or oligarchy, depending on the individual’s knowledge of the players and their perspective on the functional components. There is no “standard of value” in the domestic system of the U.S. or in the international systems for that matter. As a direct result, there is no “uniformity”, there is no “parity”, there is no “currency”, and there is no “fair market value.”

Bare words on paper about value and contracts founded upon prospective failure of consideration were the pattern of conduct. The lust for profit and unfettered powers disregarded fundamental principles of just, fair and honest dealings. The end results were both foreseen and foreseeable.

Mr. Obama and his “scheme team” will probably assume their respective positions in 2009 with the “plan” already in place and in motion. Whether one refers to it as “Brady Plan” swaps or as the “New Green Deal”, where the globally integrated financial system purports to use natural resources and production as the “value”, makes little or no difference. It will not be “utopia” and it may very well end in dissolution as shown in past and recent history.

When political regimes, autonomous organizations, or a combination employ absurdities in their mad attempt to achieve the impossible, they are destined to failure.

Maturin November 28, 2008 at 3:13 pm

Paul Volcker was a founding member of the Trilateralists. He is on the Council on Foreign Relations, attends the Bilderberg Group meetings and is David Rockefeller’s boy.

He is also head of the Group of Thirty, that wishes to set the rules for international finance and pave the way for one world government.

Can you say “New World Order?”

peter connor November 28, 2008 at 8:17 pm

Having sold his integrity for sixpence in the UN Oil for Food scandal, Volcker will be a reliable, if intellectually worthless, shill for whatever statist solutions the Obama regime tries to sell us.
Oh Paul, we hardly knew ye.

prettyskin November 29, 2008 at 12:26 pm

A true green politician, Obama is right on target practicing recycling very well. All he has given us, thus far, is a reusable Clinton administration. Regrettable, the voters could have done this with Hillary. That’s why they didn’t vote for her. Now, he has refitted, readjusted, and redirected Hillary to his liking.

Wait, these folks (Emanuel, Geithner, Goolsbee, Napolitano, Jones Jr.) are of all the same mindsets (socialists). The people have been led away by media and Obama.

Michael E. Lawrence November 29, 2008 at 4:37 pm

I suppose we should expect our change to come in pennies.

DD November 30, 2008 at 12:02 am

Yes of course Obama will not only fail, but make things worse. But I am afraid that once again free markets will be blamed.

I can imagine 15% unemployment and over 10% inflation rate, and most experts and analysts saying that it would have been much worse if not for the harsh response of the current administration. They will see 2 milion jobs created artificially by Obama, and say look at those 2 million jobs! If it wasn’t for Obama, we’d have 2 million more unemployed.
I am afraid that after this crisis, China will be more capitalistic then us.

cglace November 30, 2008 at 12:32 am

There was a great article on Asia Times tearing up Obamas future staff. It can be found here.

Bruce Koerber November 30, 2008 at 11:41 am

So is it now known that Paulson and Volcker are out-in-the-open, exposed members of the inner circle of the unConstitutional coup?

They probably feel safe since it is impossible to imagine any of the ‘President’s men’ or of the members of Congress ordering their seizure for being part of the horrific economic terrorist ring. Their false sense of security is what brings them out into the open.

What can be done to bring them to justice? What can be done to ‘convince’ them to reveal the names of the other traitors?

We know one thing for sure, the government will protect these criminals.

Walt D. November 30, 2008 at 12:49 pm

The forgotten man quotes Paul Volker
[and then]
Mathematical modeling, drawing strong inferences from the past, has demonstrably failed
to anticipate unexpected events of potentially seismic importance. The commonly cited “two
sigma” or “once in a 50 years” event has materialized too frequently to validate that approach.
Part of the problem, as I understand it, is that mathematical modeling simply cannot deal with
markets where it is not random or physically determined events but human instincts that cause
self-perpetuating waves of unwarranted optimism or pessimism.
The combination of herd behavior, opaque loan characteristics, and breakdowns of
market function at times of crisis has also raised important questions about the characteristics
and usefulness of “mark-to-market” accounting, particularly its extension in uncertain and
illiquid markets to what is euphemistically known as “fair value” accounting. That is too
complicated a subject for me to linger on today. Suffice it to say there cannot be much doubt that
“mark-to-market” is an essential discipline for trading operations, hedge funds and other thinly
capitalized financial firms. What is at issue is the extent to which it is suitable for regulated,
more highly capitalized intermediaries, including commercial banks. Their ongoing customer
relationships, the value of which is not automatically correlated with reversible swings in market
interest rates, cannot be easily reduced to a market price or a mathematical model.

[and]
The recitation of particular market vulnerabilities, of supervisory lapses, of failure to
close gaps or end disagreements among regulators is not surprising. In the United States,
informed observers, market participants, officials themselves have long been aware of
fragmented responsibilities, competing and overlapping institutional objectives, and ingrained
resistance to change. Established agencies haven’t been able to keep up with all the complexities.
The drumbeat of lobbying pressure has not been for more effective supervision; to the contrary,
it’s been fear of allegedly heavy handed and intrusive official intervention damaging to the
competitive position of institutions operating in international markets.

Perhaps most insidious of all in discouraging discipline has been pervasive compensation
practices. In the name of properly aligning incentives, there are enormous rewards for successful
trades and deals and for loan originators. The mantra of aligning incentives seems to be lost in
the failure to impose symmetrical losses – or frequently any loss at all – when failures ensue. The
point has been made time and again, yet, with rare exceptions, compensation committees and
their consultant acolytes seem unable to break the pattern. That may not be an area that law or
regulation can, or should, deal with effectively. Surely it is a matter for the leadership of large
institutions, particularly those sheltered by official support….
[and]
The recitation of particular market vulnerabilities, of supervisory lapses, of failure to
close gaps or end disagreements among regulators is not surprising. In the United States,
informed observers, market participants, officials themselves have long been aware of
fragmented responsibilities, competing and overlapping institutional objectives, and ingrained
resistance to change. Established agencies haven’t been able to keep up with all the complexities.
The drumbeat of lobbying pressure has not been for more effective supervision; to the contrary,
it’s been fear of allegedly heavy handed and intrusive official intervention damaging to the
competitive position of institutions operating in international markets.

Perhaps most insidious of all in discouraging discipline has been pervasive compensation
practices. In the name of properly aligning incentives, there are enormous rewards for successful
trades and deals and for loan originators. The mantra of aligning incentives seems to be lost in
the failure to impose symmetrical losses – or frequently any loss at all – when failures ensue. The
point has been made time and again, yet, with rare exceptions, compensation committees and
their consultant acolytes seem unable to break the pattern. That may not be an area that law or
regulation can, or should, deal with effectively. Surely it is a matter for the leadership of large
institutions, particularly those sheltered by official support.

There is a lot here that Austrian Economics would agree with.

Bruce Koerber November 30, 2008 at 1:57 pm

It depends on what you mean by: “There is a lot here that Austrian Economics would agree with.”

There is a wide spectrum of economic persuasion and there are some who jump around on that spectrum depending on the specific issue.

The range of that spectrum where Austrian economics resides is in the range that can be classified as classical liberalism. There is a test, one that is easy to use, to identify the authenticity of those economists who may appear to overlap into the ‘Austrian economics’ portion of the spectrum.

The test is the real world! The test is deeds not words! Here is the test in the clearest of terms: Is the ‘economist’ an interventionist? It is a yes or no proposition. There is no gray area.

Now since we know that Volcker is an interventionist, does it help to have an interventionist of his type among the inner circle of the unConstitutional coup? Can any of these economic terrorists separate out which injustices around the world that they had less of a hand in? Is treason a gradation?

We are living in a time when fuzziness in identifying true economics from fallacious economics does a tremendous disservice. I am not talking about intolerance, I am talking about economic science versus quackery.

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