Thursday, October 15, 2015

Lincoln Chafee deserves a do-over

Normally I too would have very little tolerance for a Senator making lame-sounding excuses for having cast a disastrously wrong vote, but I nonetheless think that Lincoln Chafee got a bum rap over his vote to repeal Glass-Steagall.  Look at the actual timeline of what happened back in 1999:
The final vote came on Nov. 4, 1999, the same day Mr. Chafee was sworn in as Rhode Island’s senator. He filled the seat vacated by the death of his father, John Chafee, on Oct. 24, 1999.  [Emphasis added.]
So... his dad dies and a week and a half later he finds himself on the Senate floor having to cast a vote on this bill that is on its way to being passed by an overwhelming bipartisan vote (90-8 with two abstentions).  His vote isn't going to make a whit of difference in the outcome.  Under those circumstances, I don't think it was completely unreasonable for him to decide to punt on his homework and just go with the flow.  Surely not his finest hour, but you know, if that's the worst mistake he ever made in his political career I think he would actually make a fine president.


Don Geddis said...

I'm not sure whether it helps, or hurts, your case, if I don't actually believe that repealing Glass-Steagall was "a disastrously wrong vote".

I suppose it doesn't matter, since you're arguing that Chafee believes it is, and he should get a break in this case, due to the timeline.

Ron said...

It's a bit of a moot point now that Chafee is out of the race, but I am curious how you can defend the repeal of Glass-Steagal in light of the very nearly catastrophic events of 2008.

Don Geddis said...

Oh! That's pretty easy, actually. The subprime mortgages, housing crash, and financial crisis -- despite the common mainstream narrative -- were not actually the cause of the Great Recession. The cause was the US Federal Reserve's mismanagement of the money supply, choosing a tight money policy exactly as money demand in the economy skyrocketed.

There is no necessary connection between the health of the financial sector, and the health of the overall US economy. Glass-Steagal is a regulatory attempt to say, if certain firms carry systemic risk, if they are Too Big To Fail, then we as a society have a right to limit our exposure to that risk. That's all completely backwards. Banks should have the free market option to take whatever risks they wish -- and the freedom to go bankrupt if they choose poorly. Just like any other industry.

The subprime mortgage crisis was essentially over in 2007. The housing boom crashed in 2006. But the overall US economy didn't enter the prolonged and severe recession until 2008. Subprime and housing was not the cause of the recession; the Fed's tight money was the cause. (Imagine, in an ordinary economy, the Fed's interest rate was 5%, and then for no good reason the Fed suddenly decided to raise the prime interest rate to 15%. The effect on strangulating the economy, on widespread bankruptcies, on elevated unemployment, and reduced real output, is exactly what we saw happen in 2008. It was masked, because nominal interest rates actually declined a little bit. But real interest rates skyrocketed in 2008.)

The "crisis" of 2007, should have been localized to a specific industry, and the huge and diverse US economy should hardly have noticed. Just like the "dog that didn't bark" of the stock market crash in 1987, or the dot-com crash in 2000. Yes, if you're in that industry, it matters a great deal. If you aren't, you hardly care. 2008 was different, but not because the financial sector is different. 2008 was different, because the Fed messed up.

By the way, all that says, is that Glass-Steagal was (mostly) irrelevant to the 2008 recession. It would be a separate conversation to ask, even if it doesn't matter to systemic risk, is repeal a good idea or not? I still would argue that repeal is the right choice, that Glass-Steagal is an example of feel-good over-regulation. But that's essentially a separate conversation. I would agree that you would first need to be convinced that Glass-Steagal repeal was not responsible for the Great Recession.