White House Takeover

As the drawn out battle to select a Democratic candidate winds down, electors must now focus on the policies of the potential presidents seeking votes this November. Whoever enters the White House next January has a formidable in-tray of economic problems to confront. No doubt uppermost in the minds of Senators McCain and Obama is the state of the US economy. How can a recession be prevented, or, if it can’t, how can it be made as short as possible?

Once that not insignificant problem is surmounted, next on the agenda must be measures to prevent the current debacle from occurring again. Since campaigning started, the financial environment has suffered severe upheaval. US property prices have almost halved. And the sub-prime crisis has hit not only individuals but banks. Most have incurred substantial write-downs, pushing them into losses and a scramble to raise fresh capital to restore their battered balance sheets. The most notable victim has been Bear Stearns, saved by JP Morgan for a bargain price.

The loose credit problems have largely stemmed from the heady cocktail created by these banks, of taking higher yielding loans and repacking them into sophisticated financial instruments with lower coupons but similar risks. Several commentators have noted this was only effectively possible after the Glass Steagall Act was repealed by the Clinton administration in 1999. This law, imposed during the Depression in 1933, was designed to separate commercial and investment banks. Can a measure to restore this regulatory regime be ruled out?

Obama has said he would not “go back to the regulatory framework of the 1930’s because the financial markets have changed substantially”. Hilary Clinton would presumably be against reintroducing a measure that was repealed by her husband. John McCain as a relatively liberal Republican would be even more reluctant to ensnare the banks. However, his position is not clear. He has said “the role of government is to help the truly needy, prevent systemic economic risk, and enact reforms that prevent the kind of crisis we are currently experiencing from ever happening again. Those reforms should focus on improving transparency and accountability in our capital markets — both of which were lacking in the lead-up to the current situation.”

Obama seems keener on more regulation, saying that whilst the old regulatory regime has been dismantled, “a 21st century regulatory framework” has not been established, leading to an “environment that helped foster devastating dislocations in our economy”. He claims the repeal of Glass-Steagall “was more about facilitating mergers than creating an efficient regulatory framework”, referring to Citigroup’s subsequent deal making. Recently Obama has indicated he would be even keener to police future merger proposals such as Microsoft / Yahoo, saying: “I will assure that we will have an antitrust division that is serious about pursuing cases”. McCain is against such moves believing both Obama and Clinton are in favour of “more federal regulation and more government control of the economy”. Whoever wins the White House race, the next President looks like intervening more in economic policy than the current incumbent.

Chris Spink is a senior reporter with Acquisitions Monthly, a Thomson Reuters publication. This post originally appeared at Thomson Merger News.