As I write these lines, Americans are going to the polls in record numbers and are almost certainly going to elect Barack Obama to the Highest Office. Congratulations, Mr. President. I applaud his election. He is almost certainly the better candidate, and his presidency will begin with a great deal of promise. But there is a trap in public acceptance awaiting him in the near, almost instant, future, and it is about that I am pleading for tolerance.
A strange plea to make on behalf of a man who figures to be the most popular electee since Reagan if not Kennedy. But popularity can vanish as quickly as the morning dew, and Obama actually may be more in need of tolerance than may be at first apparent. Although Obama is widely supported, there is considerably uncertainty about who he is, and what the future actually holds. The Big Question is whether he will build his administration along the moderate conciliatory lines he indicated in his primary and general election campaigns, or in the radical vein of some of his the pronouncements he made in his earlier years. Almost everyone I know likes Obama. But the number who like the full liberal agenda of the Democratic Party is a much smaller number - perhaps the minority. The trap and the need for tolerance arise exactly here. The most immediate, pressing issue that the new Administration must confront is the credit freeze. While the chaos on Wall Street has apparently subsided, the threat to the conventional credit system remains ongoing. Something has to be done, quickly and effectively.
I have written two posts about this situation, but recapitulating won't hurt. Around forty years ago, quantitative economists developed methods for pricing and evaluating options and other financial derivatives. The methods enabled aggressive traders to spot variations, or irregularities, in various debt instruments around the globe. The irregularities, however, are almost infinitesimally small. In order to make any real money in trading these instruments - and real money means 8, sometimes even 9, figure bonuses to traders on indidvidual transaction - the instrument must be leveraged to a fare-thee-well. The leverage and market is so large that it intrudes into conventional credit structures. Maybe this profiteering-for-profiteering's-sake is endurable (glumly) in ordinary times. But when Tasseeb's Black Swan emerges - usually in the form of apparently solid collateral becoming uncertain - it turns out that this high stakes, small market game has endangered the security and even livelihood of the public at large - hundreds of millions if not billions of people. (I have yet to see any sensible explanation of how this trading market fits with conventional capital formation and economic activity.)
So something must be done. The danger to Obama is that 'something' is very likely to be fairly radical in nature - an absolute ban on such trading (outside of financial institutions), extremely restrictive licensure, aggressive oversight on the leverage involved in such trades, and so forth. There is certainly nothing new in this - the government reacting to undue concentrations of economic power goes back to the origins of the Union, with Hamilton's proposal for a national bank in his Second Report on Public Credit, Jackson's feud with the National Bank, the various populist groups such as tthe Grange, the reforms made by the Progressive movement, and of course the reforms of Wall Street in the New Deal.
But Obama is going to be burdened in these matters by the on-going question of his radicalism, based on comments and associations in his past. It is unfortunate from that perspective that the first major issue his administration must confront is one that would call for a 'radical' response from ANY Presidency.
Thus, it would be a huge mistake to turn Obama's response to the credit situation into a litmus test. The plea for tolerance is made on just that basis. Let us give him credit for good faith and moderation, however far a departure his proposals for reform of the credit system may be from traditional laissez-faire. The blunt fact is that the system has been failing catastrophically almost bienially, if you look at regional crises around the world. Banking and credit systems are uniquely in need of regulation, and rather strict regulation at that.
Proposals for radical reform of the system, in short, should not be taken as indicative of an intent to lead a radically charged Administration. I hope the always lively community of political commentators cuts Obama a little slack on this one.
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