The Emanuel Principle

http://www.nytimes.com/2009/09/06/business/economy/06view.html?emc=eta1

Alan S. Blinder is a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve. He is also well known for "Blinder's Shift" which involved a well known change in his position on free trade: while he still supports the theory of "comparative advantage" (simply put - trade with large low-wage countries like India and China can make the U.S. richer and more productive while it improves the standard of living of those low wage countries - and all will be richer; eventually), he has discovered that the job losses surrounding "globalization" for the U.S. have the potential to be much larger than he previously thought and he feels strongly that something needs to be done about that. Given the current state of the U.S. economic recovery (weak), and the status of the unemployment rate (high), Blinder's position is understandable and even, perhaps, more urgent.

In any case, Blinder's 9/6 NY Times article on "The Wait for Financial Reform" (attached) refers to President Obama's chief of staff (Rahm Emanuel) enunciating the "Emanuel Principle": you don't ever let a crisis go to waste. So, Emanuel's point was (and is) let's get everything done that we can. And, as we have pointed out here, when you put all your best people on too many things in a crisis situation, what you get is nothing.

So, it's been about a year since the financial crisis hit last September and Blinder characterizes the political indifference toward financial reform as "...somewhere between maddening and tragic." Why?

Blinder sees 5 reasons:
(1) It's yesterday's problem (how soon we forget!)
(2) The overcrowded legislative agenda (budget, health care reform, cap and trade, etc.)
(3) Heavy lobbying on all of the issues major and minor
(4) Bureaucratic infighting (government agencies fighting to keep their "turf", FDIC, etc.)
(5) A lack of focus (it's hard to keep the public engaged in something as complex and boring as financial regulation)

What's needed is a "systemic risk regulator" and the Federal Reserve is the right place for that job. We also need to do something about derivatives markets. Blinder is right about both issues but he's looking for evidence that anything is being done about it. He sees none. I see none. And, we have the Emanuel Principle...