Neither Republocrat Presidential Candidate Understands the Economy

Apparently neither Republocrat candidate for President understands how the economy works or can correctly diagnose the problems with the current economy.

The United States, indeed the global economy, experienced a credit boom and collapse.  The credit collapse caused a systemic financial crisis whereby there were (and remain) excessive levels of consumer debt, a wounded residential real estate market, and a broken financial system.  These take time on the order of years to repair, even with the best policy responses.  As a result, the recovery from a systemic financial crisis is naturally sluggish, prolonged, and vulnerable to relapse.  A recovery can not be made much stronger merely and solely because of monetary stimulus as might occur after a routine cyclical recession.

We would not expect a candidate to propose broad-based consumer debt forgiveness.  But we should expect more than promises of a sharp recovery just around the corner, increasing regulations, a so-called “jobs” plan, tinkering with the tax code, and focusing on the budget deficit in the short term.

If a candidate truly knew what ails the economy, he or she would instead work to do the following:

break up the largest financial institutions

break up any financial institution that cannot be effectively regulated

reinstate the affiliation restrictions in the Glass–Steagall Act that were repealed through the Gramm-Leach-Bliley Act in 1999 (this would separate commercial banking, investment banking, and insurance operations)

limit leverage to a reasonable multiple of a meaningful and relevant measure of solvency

regulate the derivatives business

require mortgage lending institutions to keep a significant percentage of loans they generate chosen at random

allow companies to fail

prosecute to the fullest extent of the law any company or person that violates statutes of fraud, racketeering, corruption, and other crimes as appropriate

Policy responses like these would at least go a long way to repairing the broken financial system and reducing the huge amount of systemic risks that still remain in place.  But neither Republocrat candidate seems to be doing any of these.  Thus no matter who wins the presidency the country is likely doomed to sluggish economic growth at best and possibly another recession sometime during the next four years.

 

Sources:

Obama inconsistent on pace of economic recovery

Reinhart, Rogoff Say Romney Advisers Understate Crisis Severity

Sorry, U.S. Recoveries Really Aren’t Different

This Time is Different, Again?

Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison

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