Obama Would Regulate Economic 'bubble'
As he battles the economic downturn, President Barack Obama is bracing Americans for a recovery different than any in recent memory – not a go-go return to prosperity like the 1990s but a slow, steady climb to stability.
“We know that an economy built on reckless speculation, inflated home prices, and maxed-out credit cards does not create lasting wealth. It creates the illusion of prosperity, and it’s endangered us all,” Obama said recently.
But what Obama rarely says about ending the “cycle of bubble and bust” is this: he’s prepared to intervene to make sure that kind of red-hot growth doesn’t occur.
And he’s willing to do it with added government regulation if needed to prevent any one sector of the economy from getting out of balance – the way the dot-com boom did in the 1990s and the real-estate market did earlier this decade.
According to Austan Goolsbee, a key Obama economic adviser, the president plans to focus on stopping bubbles along with preventing busts. And in an interview with POLITICO, Goolsbee said the administration will be on the lookout for new bubbles, like the tech stocks or housing prices.
If new threats are spotted, he said Obama would use “regulatory oversight to prevent guys who want to make a quick buck from doing real harm to the economy. . .That is what it means to get out of the bubble and bust cycle.”
It’s a controversial and largely untested idea – one that involves government intervention in the economy to a degree that recent presidents have been unwilling or unable to impose. There would be great political risks for Obama, particularly after the depths of this painful recession, and it would open him up to criticism that he is trying to squelch the free market.
Obama has mainstream support for his position, including from Mark Zandi, an oft-quoted economist at Moody’s Economy.com who advised John McCain during the 2008 campaign. But Zandi said there’s not much an administration can do in practical terms to burst a developing bubble. The best way to cool things down is raising interest rates, which is the purview of the Federal Reserve. Another option would be for regulators to order banks to curtail lending to buyers of certain kinds of assets.
Also, in any bubble, there are plenty of people thrilled to be the beneficiaries – tech stock owners in the 1990s, or homeowners in the 2000s. Those people would form a powerful political opposition to any effort to put the brakes on growth. That would make it extremely difficult for government officials to take action.
“It’s just human nature to let the good times roll,” said former House Financial Services Committee Chairman Mike Oxley, a Republican. “And politicians are human like everybody else. You don’t want to be in a position of throwing a wet blanket on this stuff.”
He said that’s one of the reasons why the Bush administration didn’t intervene in the housing bubble. “Nobody wanted to mess up the party,” said Oxley. “They were hoping against hope that it would naturally slow down. Not too many people are courageous enough to make that call.”
Another skeptic is Charles Blahous, former deputy director of the National Economic Council under President Bush. “If they are talking about the government affirmatively acting to slow growth in good times, that would be very troublesome,” said Blahous, a senior fellow at the Hudson Institute. One difficulty in stopping bubbles, Blahous points out, is that they aren’t evenly distributed across the country – the impact of the housing bubble varied widely from city to city, for example.
But the Obama team is optimistic that the politics and the economics would work out. Goolsbee, argues the public would react differently today than it may have in years past if government stepped in to top a bubble. “Given the events that have happened, people are in tune,” Goolsbee said. “They are now painfully aware that it’s not sustainable to build your recoveries on bubbles.”
Added Zandi: “Policy makers always intervene in a downturn. So it is necessary for policy makers to take action against bubbles. You’ve got to be symmetrical in your policy.”
Zandi believes the best way for the administration to block new bubbles is to create a new “systemic regulator” to watch out for threats to the overall economy. “There’s an old saying in banking that if its growing like a weed, it probably is a weed. If something’s growing at 40 to 50 percent a year, you want to stop and see what’s driving that. That would be the systemic regulator’s job,” he said.
Right now, the debate is largely hypothetical. There’s certainly no threat of an asset price bubble in the short term. But the economic history of the past several decades is one of recessions followed by the growth in asset price bubbles: the recession of the early 1990s was followed by the tech bubble, and the recession of the early 2000s was followed by an overheated housing market. And while economic growth of any kind would be a cause for celebration now, another bubble could follow this recession, too.
That’s why the Obama administration is taking steps it argues will ensure that the economic recovery is based on an increase in real value, not on a new bubble. They are emphasizing clean energy, health care, education and worker training – all areas they call part of the “real economy.”
Much of Obama’s public rhetoric has been aimed at reminding Americans not to create another unsustainable run-up in prices. On April 14, he told an audience at Georgetown University that the recovery should be built “upon a rock,” rather than on a foundation of sand.
But stopping bubbles isn’t as easy as it might seem.
For one thing, it’s nearly impossible to tell whether a market increase is a bubble or not from the inside. During both the tech stock and housing bubbles, there were influential national figures arguing that the price run up was based on real value, not imaginary gains. Simply deciding when to call a market increase a bubble would be fraught with controversy.
Free market oriented economists argue that the government has no business picking winners and losers in the economy. After all, stopping a bubble at any point unavoidably hurts certain investors.
“One man’s expansion is another man’s bubble,” said Dan Mitchell, a senior fellow at the libertarian CATO Institute. “I have a lot of doubts about the administration’s ability and willingness to solve booms and busts,” he said. “And I’m worried that it reflects an ideological hubris that the economy can be planned.”