Daily Archives: March 18, 2008

My instant reaction to what may have been the most important speech of Obama’s candidacy is that it was excellent. Not, for once, because it was all that well delivered. Especially at the beginning, he seemed not just calm and collected, as usual, but downright subdued. He got more comfortable as he went on, but the whole thing felt more like a statement announced under some duress (which I suppose it was) than a speech he was ever keen to deliver. On the substance, though, my feeling is that he hit every target. Perhaps the association with Wright will still prove to be a net negative. We will find out in due course. But I thought Obama dealt with the issues so well that, at least for me, the whole fuss over Wright might turn out to work to his advantage.

In my previous post on the Wright affair I called Obama’s first line on the matter–”I wasn’t present when he said those things”–a transparent evasion. I was very glad to see no trace of that in the speech:

I have already condemned, in unequivocal terms, the statements of Reverend Wright that have caused such controversy. For some, nagging questions remain. Did I know him to be an occasionally fierce critic of American domestic and foreign policy? Of course. Did I ever hear him make remarks that could be considered controversial while I sat in church? Yes. Did I strongly disagree with many of his political views? Absolutely – just as I’m sure many of you have heard remarks from your pastors, priests, or rabbis with which you strongly disagreed.

Rather than pretending he was unaware of Wright’s views, he confronted them:

But the remarks that have caused this recent firestorm weren’t simply controversial. They weren’t simply a religious leader’s effort to speak out against perceived injustice. Instead, they expressed a profoundly distorted view of this country – a view that sees white racism as endemic, and that elevates what is wrong with America above all that we know is right with America; a view that sees the conflicts in the Middle East as rooted primarily in the actions of stalwart allies like Israel, instead of emanating from the perverse and hateful ideologies of radical Islam.

As such, Reverend Wright’s comments were not only wrong but divisive, divisive at a time when we need unity; racially charged at a time when we need to come together to solve a set of monumental problems – two wars, a terrorist threat, a falling economy, a chronic health care crisis and potentially devastating climate change; problems that are neither black or white or Latino or Asian, but rather problems that confront us all.

That seems to me exactly right. But having criticised his pastor so frontally, Obama then had to explain why he nonetheless has remained a member of his church and evidently holds the man in such high regard. He did this too–first in a very personal way, but then in an explanation that broadened out to touch on the main themes of his campaign.

I continue to be astonished by Alan Greenspan’s timing. It is quite uncanny. In a column for National Journal last September (pasted after the jump, if you’re curious) I applauded the timing of both his departure from the Fed and the subsequent publication of his memoirs, which coincided beautifully with a spike in concern for the mess he left behind. And now—a smaller achievement, admittedly, but impressive nonetheless—he has a long column in the FT on the very day that the paper leads with news of the extraordinary “rescue” of Bear Stearns by J.P. Morgan and the Fed (something which nobody saw coming when the column was commissioned and written). The man is a magician.

In this new article Greenspan says that the current financial implosion is mainly due not to poor regulation but to the inescapable complexity of modern finance, and to the fact that the science of risk management has not yet caught up.

The essential problem is that our models – both risk models and econometric models – as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality. A model, of necessity, is an abstraction from the full detail of the real world. In line with the time-honoured observation that diversification lowers risk, computers crunched reams of historical data in quest of negative correlations between prices of tradeable assets; correlations that could help insulate investment portfolios from the broad swings in an economy. When such asset prices, rather than offsetting each other’s movements, fell in unison on and following August 9 last year, huge losses across virtually all risk-asset classes ensued.

The answer, Greenspan says, is not to move away from “counterparty surveillance and, more generally, financial self-regulation as the fundamental balance mechanism for global finance”. He is less clear on what the answer actually is, except to be patient while the finance experts improve their models.

I do not count myself among the claque of registered full-time Greenspan critics, but I have to say it takes some nerve to contemplate conditions in the financial markets today and talk of the virtues of self-regulation. If that view has not been discredited by recent events, one has to wonder what it would take.

The fundamental problem, in my view, was not insufficiently clever risk-management models. It was moral hazard (operating at multiple levels); a gross failure of regulation in mortgage lending (for which Greenspan is substantially responsible: remember that he was a cheerleader for the subprime lending business); a structure of finance-industry incentives that rewarded greed and recklessness indulged at others’ expense (itself a failure of regulation); and last but not least the most credit-friendly tax regime in the world.

One remedy that Greenspan does advocate in his article is larger “capital buffers” for banks and other lenders—he notes that private investors are already demanding this. Yes, that is putting it mildly. But whether private investors continue to demand it or not, a new and much tougher approach to capital adequacy is (among other changes) something regulators must now insist upon. The real lesson of this crisis is that the authorities will do anything—at any cost to taxpayers—to shore up a financial system on the point of being wrecked by greed and incompetence. For the sake of minimising the harm to innocent bystanders, they may very well be right to take that view. But the quid pro quo is stricter regulation. Implicit uncapped guarantees plus “self-regulation” is a formula for the very disaster now unfolding.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

Clive Crook’s blog: A guide

Comment: To comment, please register with FT.com. Register for free here. Please also read the FT's comments policy here.
Time: UK time is shown on Clive's posts.
Follow the blog: Links to the Twitter and RSS feeds are at the top of the blog.
Schedule: Clive's column appears in the FT on Mondays and you can read an excerpt of it on this blog.
FT blogs: See the full range of the FT's blogs here.


« Feb Apr »March 2008