Fixing the profound, arcane problems on Wall Street makes Social Security reform or a tax-code overhaul look easy. No wonder John McCain and Barack Obama have been fulminating about the unfairness of it all—while sidestepping specific prescriptions. "They're treading very carefully because they don't want to take a position that turns out to be laughable," says economist James Barth of the Milken Institute.
But as the stock markets have tanked and the government has rescued huge, foundering companies like AIG, each candidate has started testing ideas for overhauling Wall Street. McCain, who said earlier this year, "I'm always for less regulation," has been more vague, consistent with his free-market leanings. Obama, ever the wonk, has outlined a six-point plan that includes some old ideas and some new ones. Here are the most prominent plans each candidate has outlined so far:
Fire Chris Cox, chairman of the Securities and Exchange Commission. This is somewhat puzzling. The SEC bears a bit of responsibility for the Wall Street meltdown, but its main job is enforcing laws that govern the way companies do their accounting, disclose information, and trade their shares. The SEC isn't responsible for monitoring speculators or auditing banks. Even if it were, many of the market's problems stem from investments that were riskier than anybody realized. That's not fraud—it's one of the risks investors take when gambling on high returns.
McCain may be confusing the SEC with some of the other "alphabet soup" agencies he has routinely lambasted. The main agency that monitors speculators—who usually operate in commodity or currency markets—isn't the SEC but the Commodity Futures Trading Commission. In terms of all the bad mortgages that underlie the financial crisis, a better villain than the SEC might be the Office of Federal Housing Enterprise Oversight, whose job is to oversee the mortgage giants Fannie Mae and Freddie Mac. But hardly anybody has ever heard of OFHEO, which is probably why McCain is picking on the better-known SEC.
Set up a new government agency to handle all the bailouts. McCain would call this the Mortgage and Financial Institutions Trust and model it on the Resolution Trust Corp. that did a pretty good job of handling the assets of failed savings-and-loan institutions starting in the late 1980s. This sort of idea is gaining traction among financial experts. One advantage is that it would deal with all troubled financial institutions more or less the same, instead of the current ad-hoc approach that has left investors deeply confused about which companies are worth saving and which aren't. Some critics of such a plan would prefer to see the markets dismantle failed companies on their own, which is what's happened with Lehman Brothers. That may have already occurred to a large degree by the time McCain's trust gets set up, well into next year at the earliest.
Prosecute CEOs who mislead the public. The top executives at Bear Stearns, Lehman Brothers, and Merrill Lynch all assured investors that their companies were doing just fine, even as losses and writeoffs mounted. But that's not fraud, unless those companies published false or misleading information in their SEC filings or other official reports. Hyperbolic CEOs—carefully guided by lawyers—are a staple of corporate America, which is one reason stock analysts get paid big bucks to figure out what's really going on. Maybe McCain should focus on some of them.
Tighten financial regulations. This is likely to happen no matter who is president. McCain has highlighted a familiar set of populist pleas: Rein in financial speculators, toughen rules on any firm gaining access to federal loans, and consolidate a mish-mash of regulatory agencies.
Cut taxes, corral special interests in Washington . McCain's pet causes have nothing to do with the financial crisis.
End greed on Wall Street. Good luck.
Enact tough penalties on fraudulent lenders. There are already laws against fraudulent lending. The problem hasn't been punishing the fraudsters—it's been identifying them, before they do a lot of damage.
Toughen financial regulations. Obama's reforms would include new oversight of investment banks and other firms that have largely escaped scrutiny until now, more disclosure by financial firms, higher capital requirements for firms used to operating with a minimal cash backstop, and more consistent rules that apply to all financial institutions, not just regular banks. Many of these ideas have bipartisan support and seem likely to happen no matter who wins the White House.
Establish a financial markets advisory group. This assemblage of presidential advisers would meet regularly to take the temperature of the markets and blow the whistle if they see trouble brewing. Nice idea, except that such advisory groups usually have no actual power and are only effective if top officials listen to them. In the early days of the current crisis, plenty of people in Washington were waving red flags—and were mostly ignored by top policymakers.
Enact a $50 billion stimulus plan. Obama wants to create jobs by funding new infrastructure projects, rebuilding schools, and helping bail out state and local governments that are in the red. Whatever the merits, a second stimulus wouldn't address any aspect of the crisis on Wall Street. And infrastructure-type projects tend to take years before the overall economy benefits.
Cut taxes on the middle class, reduce dependence on imported oil, make healthcare more affordable. Obama's pet causes don't address the financial crisis any more than McCain's do.
Prevent this kind of turmoil in the first place. Too late.