The next Presidential administration might be the most important one since Franklin Roosevelt’s New Deal set the course for America through the 1990’s.
My previous article explored five key domestic reforms which should be the immediate priority of the next President: resolving the federal deficit and national debt; reforming the tax code; defining America’s national energy policy; improving education at all levels; and providing a long-term fix for immigration.
This article will explore the next five initiatives, including the additional challenge of fixing the financial regulatory structure that I left off my initial list, but shouldn’t have.
- Fix the financial regulatory structure
- Create the National Infrastructure Bank
- Electoral and campaign finance reform
- Return to space
- Address climate change and over population
- The Architect of Democracy
These next challenges are no less important than the previous five; in fact, I will argue that the last four of these issues are of strategic transcendence, and for that reason are less open to immediate solution. That is why I have left them to the end.
6. Fix the financial regulatory structure
The 2008 financial crisis has been enormously popularized over the past four years and already spawned many myths. Perhaps one of the most prevalent is that “too big to fail” (TBTF) banks caused the Great Recession. This is false. The Great Recession was caused by overly lax monetary policy for the better part of a decade, overly lax regulatory scrutiny and overly lax underwriting in most of America’s financial institutions, not just the big ones. Coupled with a vast surge in unregulated derivatives, like securitized home mortgages, a systematic failure in ratings agencies to appropriate value these derivatives, and a chain of swaps and insurances that tied the global financial system together in altogether inscrutable ways, and you had all the dominoes in place for a liquidity crisis as soon as the US housing market began to cool in 2007.
The catalyst was the Bush Administration’s decision to let Lehman Brothers fail: they were seen as non-systematic and thus made a suitable subject for a lesson in moral hazard. Unfortunately, the government completely misjudged the interactions between Lehman, AIG, and all the web of credit default swaps and other very short-term financial arrangements between the world’s lending institutions. That turned a liquidity crisis into a full-bore panic; it turned something expensive but manageable, into the Great Recession.
That is not to say that TBTF played no part; the danger to these institutions forced the U.S. government to intervene massively to stabilize the financial system. For one thing, these institutions held vast liabilities in the form of individual savings of US citizens; ever since the Gramm-Leach-Bliley Act was passed in 1999, the firewall between deposit-taking institutions and riskier investment banks was dismantled. This allowed vast megabanks like Citigroup and Bank of America to merge these two businesses. Of course, the government insures deposits: with the creation of the megabanks, that guarantee has implicitly extended to all of the bank’s activities, no matter how risky. Thus, a sensible guarantee of private citizens’ deposits extended to prevent 1930’s style bank runs, has morphed into a blank check for Wall Street.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 had already dismantled the regional restrictions established by the 1956 Bank Holding Company Act. This was another, earlier step in the development of the megabank. In fact, the entire regulatory architecture established during the 1930’s Great Depression was systematically gutted during the 1980’s and 1990’s. The SEC, FDIC and early Federal Reserve remained, but the institutional framework that facilitated the work of these regulatory bodies was eliminated, making their work increasingly impossible.
Public outrage at the excesses of the credit bubble and the assumed villainy of the bankers and Wall Street (and there was plenty of villainy to go around at the end, such as Goldman Sachs betting against its own deals in violation of all ethical and fiduciary responsibilities) should have pushed Congress into taking action, even as it led in 1933 to the Pecora Commission. And Congress did hold many outraged hearings. Unfortunately, what came out of the hearings was not the bold restructuring of the financial landscape of the ‘30’s, but an extraordinarily tepid and complex act called the Dodd-Frank Wall Street Reform and Consumer Protection Act. Needless to say, it will accomplish neither.
The most significant accomplishments of the Act are arguably the Orderly Liquidation Fund, which will be funded by banks, and which will be coupled with the Orderly Liquidation Authority Panel to make government interventions in insolvent banks more efficient and less costly; and the Consumer Financial Protection Bureau, which will attempt to rein in the worst abuses of the predatory lending industry in America and was long overdue.
Unfortunately, Dodd-Frank does not address the problem of TBTF. It can be argued, in fact, that the Orderly Liquidation clauses are recognition that the next financial crisis will also require massive government intervention and only adds to moral hazard. The Act establishes two more regulatory bodies, but doesn’t address the fundamental problem of excessive complexity and lack of transparency in financial market transactions – problems which are impossible for regulators to deal with. The regulation of Hedge Funds is a welcome step, but experience indicates that regulators will be unable to keep up with the extraordinarily rapid evolution of derivative products, financial flows and cross border movements.
The relentless increase in liquidity is not going to stop: if anything, it is accelerating. The notional value of global derivatives is twenty times the entire world’s GDP. Financial products are not getting simpler, they will continue to evolve and become more complex. Financial institutions are not getting any smaller; they are becoming even bigger. Systematic risk in financial markets is greater today than in 2007. What’s to be done?
The next President will have to face this challenge, and the entrenched interests of global financial institutions. To say that it is an uphill battle is to call hurricane Sandy a “pretty big storm”. Simply reinstating the 1930’s financial architecture won’t work: such measures would provoke the very financial crisis we are trying to avoid. Financial institutions, and the global flow of liquidity, have grown far beyond the control of national banking systems. Measures would have to be coordinated between major markets to ensure that loopholes were closed and systematic risk could not be shifted from a “strict” market to a “lax” market – contagion would follow all the same.
At least some of the measures that should be adopted have a degree of support in other parts of the world, especially Europe.
- An updated version of Glass-Steagall, which would physically separate low-risk, government guaranteed businesses (like deposits) from high risk, unguaranteed businesses (like trading in derivatives);
- A repeal of the Commodity Futures Modernization Act, a stricter regulation of the types of derivatives being traded, and a requirement to own the underlying assets before being able to purchase certain types of derivatives, like credit default swaps;
- Strict limitations on the securitization of mortgages, with lending institutions being required to keep significant risk on their books rather than collateralizing it and spreading it throughout the financial system, coupled with stricter requirements for mortgage underwriting;
- A global transactions tax, or Tobin tax, on certain types of high velocity, speculative financial transactions – it would have to be agreed upon globally to ensure that no arbitrage opportunities existed and that all national governments would be willing to implement it to avoid losing their financial services industry to non-compliant regions;
- Stricter standards for credit rating agencies, as well as greater oversight including civil and criminal liabilities for certain collusive behaviors. It should not be enough to preface ratings with “In our opinion” in order to take a mulligan.
Other measures will no doubt be needed, but most lacking will be the political will to make this happen. Even as it took 20 years to dismantle the most successful regulatory framework of our nation’s history, so it will take another 20 years to rebuild it. It would have to be phased in gradually to allow for an orderly unwinding of the TBTF banks, of the $1.2 quadrillion derivatives market, and of the trillions in consumer, corporate and government debt which helped fuel the credit bubble. And it will require discipline on the part of governments and central banks, to rein in spending and the never-ending cycle of quantitative easing.
I’m not holding my breath just yet.
7. Create the National Infrastructure Bank
Republicans decry all government involvement in the private sector and excoriate “wasteful, bureaucratic” spending on big projects. Our history demonstrates conclusively that the nation was built on large public infrastructure projects. Many of the most influential, beneficial and well-known investments were made entirely or substantially using Federal funds. These include the Trans-Continental Railroad, the Hoover Dam, and the Eisenhower Interstate Highway system. The list of state funded roads, bridges, canals, ports and other essential structures is innumerable.
So prolific has been the building up of the nation’s infrastructure, and so stingy have law-makers become in voting funds for necessary maintenance and improvement, that today it is estimated that America has over $2 trillion worth of needed investment. These are not new projects; this is money which will keep our bridges from falling and our roads from becoming impassable. Apart from being necessary, these investments are timely: the government is experiencing historically low borrowing costs and infrastructure investments not only generate a positive economic return, but also would serve to put Americans back to work. This is undoubtedly one reason that Republicans have balked at approving such spending bills: it wouldn’t due to have unemployment fall before the general election.
Having Congress write a check for $2 trillion is not the answer either: it is neither possible nor advisable. Some projects are more urgent than others, and some offer a higher economic return: more bang for the federal buck. Unfortunately, Congress doesn’t have the time, skills or institutional capacity to sort through thousands of projects and prioritize them. Politics would trump all other considerations and the public interest would suffer.
What’s needed is a National Infrastructure Bank. A publically-funded corporation, it would be charged with conducting the necessary due diligence to successfully prioritize projects based on economic, rather than political considerations. The Bank would be authorized to extend loans and lines of credit, issue loan guarantees for private banks, and to invest directly in the capital of private companies involved in Bank projects. The investments of the Bank would have to generate a financial return in order to preserve the capital entrusted to it, but it would not be under market pressure to generate immediate returns, allowing it to invest in projects that would be profitable over very long time horizons.
Such a Bank would naturally report back regularly to the Congress and its charter could be amended, but a fundamental consideration would be to maintain the independence of the Bank’s directors and Board, to ensure the prudential management of the public’s interest. Board and executive appointments would be for long terms and not subject to Congressional whim; Bank staff would be long-term professionals rather than appointees. The Bank would be audited regularly by independent agencies, just as any other private corporation.
Once in operation, the Infrastructure Bank could fund large projects whose urgent need is recognized, but whose extremely long-term returns and political uncertainty turn off private investors. Participation by the Bank would serve to entice private investment by creating an implicit (and possibly explicit) guarantee of government support and of long-term returns; it would serve as a “safe harbor” for funds seeking security as well as financial gains. And it would avoid the bloody partisan battles and inevitable riders attached to each and every spending bill that passes the Hill.
The modernization and extension of our early XXth century electrical network would bring immense economic gains to the nation as a whole and should be part of a national energy policy; the modernization of our port facilities to facilitate exports; the upgrading of our rail network to relieve urban congestion and reduce transportation costs for companies; these are just a few of the urgent priorities for our nation to make us internationally competitive through the next century.
8. Electoral and campaign finance reform
The American political system is extremely robust, having survived unrest, civil wars and radical changes in technology and society for over two hundred years. It is the oldest continuous democratic government on earth, and we are justifiably proud of it. Even so, our Republic includes some features which can only with generosity be described as “anachronistic”, “less than democratic” or “lacking virtue”.
One of the most egregious offenders is also the oldest. Ever since the founding of the current Federal form of government in 1789, states legislatures have been busily drawing and redrawing Congressional districts into the most abstract and torturous shapes imaginable in order to secure “safe districts” where a majority of the inhabitants are voters of one party. Elbridge Gerry of Massachusetts, one of the original Founders and signers of the Declaration of Independence, also gave his name to this practice. We know it today as “gerrymandering”, and it occurs every ten years, after the decennial census.
A gerrymandered district can take any shape or form. Some are long and winding, while others resemble rabid amoebas, with pseudopods extending out to absorb distant suburbs of like-minded voters. Their only purpose is to ensure that the party in charge of the legislature has an absolute, unchallengeable majority in these districts, and thus no need to fear challengers or spend campaign funds on it. What is worse is that the opposition party usually cooperates: after all, they too get homogenous districts out of the left-overs. This has led to a gradual reduction in the number of truly competitive districts: 74 according to an analysis by Fair Vote, just 17% of Congress, and 15 fewer than in 2010.
Is there any spectacle less flattering to our democracy than this outright corruption and election-rigging? What happened to the free competition of ideas, of voter choice and the principles of honest representation? Of course, law-makers are all for it: but citizens should be out in the streets demanding change. Yet most Americans have no idea what gerrymandering is, nor its universal pervasiveness.
The Center for Public Integrity produces a report card of state transparency, including their redistricting practices. The latest report graded 24 states with a “D” or an “F” for deliberate and pervasive efforts to cloak their plans in secrecy, manipulation of public opinion and outright deception. This has led to 194 lawsuits being filed in 41 states. Only 18 states received “A’s” for maintaining a transparent and open process involving citizens.
Nor could the Federal government simply pass a law to outlaw the practice, it is beyond the Constitutional powers attributed to the central government. Washington could offer inducements, however, to states that adopted independent boards: such as withholding certain types of Federal aid to those states that maintained gerrymandered districts. The Federal government could also use its considerable influence and outreach with the general public to inform citizens, shape opinion and help organize concerted action for change.
The principal actors must be citizens themselves; the public clamor must be loud enough to scare state legislators into changing. Direct, grassroots action is undoubtedly the most efficient way of swaying law-makers, but difficult to organize and difficult to sustain. Court challenges based on Federal laws, such as the Voting Rights Act, might be an alternate means of burying this nefarious practice.
Campaign finance reform is another area where our democracy falls short and seems irreconcilable with the great principles of representation. It is not simply a question of the total money spent by one or both sides during elections, though the figures are astonishingly large: an estimated $6 billion will have been spent in all races in the 2012 general election. It is the lack of transparency in spending, as well as the spending by private corporations and institutions made possible by the Supreme Court’s decision in Citizens United v. Federal Election Commission.
The Supreme Court’s majority argument in this case is based on the broadest possible definition of freedom of speech, and the extension of this guarantee to political speech made by corporate persons. This ruling goes against many precedents and a very long judicial record that treat “corporate speech” as lesser and subsidiary to individual speech rights. Prior Courts have upheld the difference between the two, and not extended full First Amendment guarantees to corporations.
On a more fundamental level, why should corporations have any Constitutional rights at all? The Constitution is a compact between the people, wherein all sovereignty resides, to establish a government that will promote their objectives (i.e. the general welfare, etc…). You can search the document and all of its amendments and never once find the word “corporation” or “company” mentioned in it. It should be self-evident that corporations have no existence and no rights beyond those that the laws of the land, as made by the States and Congress, grant to them; and subsequently these legislative bodies can amplify or restrict them as they see fit. Certainly, they should have no Constitutional rights, which are exclusively reserved for the people.
What about freedom of speech, claim proponents of the ruling? What about it? Every individual that has ownership in or works for a corporation, or pertains to a union, would still fully enjoy their Constitutional freedoms to speech, assembly and petition. That is unquestioned. What I deny is that a company, as a judicial person, has a right to involve itself in politics.
What happens when foreign firms open American subsidiaries? These foreign held subsidiaries would have same political speech rights as U.S. citizens and could spend freely on influencing U.S. elections. How is that rational? If I invest in a company that later uses my money to purchase advertising against a candidate that I support without my consent, is that not trampling on my rights as both owner and citizen?
I make a case in “Building Support for a 28th Amendment” that we may need to down that route in order to do away with the spectacle of companies, unions and other corporations spending billions from their general treasuries to buy elections.
9. Return to space
At the height of the Space Race against the Soviet Union, the United States was dedicating 7.5% of all discretionary spending, or 1.1% of GDP, to General Science, Space and Technology research. The result: we put a man on the moon and returned him safely to earth within a decade. What’s more, the investment in science and technology propelled the initiation of the Third Industrial Revolution 20 years later and ushered in a Golden Age of U.S. economic growth.
It is unquestionable that the investments made by NASA and other government agencies in research and development led directly to developments in the laser, in satellite communications, in advanced materials, in computers, in optics, and in hundreds of other applications that were needed for the Mercury and Apollo programs, which were later converted to marketable products. Merely being in space furthered our knowledge in dozens of fields, including general physics, fluid and thermal mechanics, zero-gravity chemistry and biology, radiation, atmospheric and marine sciences. Our world, and our country, would be vastly poorer without the technological and scientific explosion that resulted from our successful competition with the Soviets. We have Khrushchev to thank for the internet as much as Kennedy.
Today, we are dedicating less than 2.5% of all discretionary spending on science, space and technology, equivalent to 0.2% of GDP. The proportion of that spending on space has fallen even farther than general research, from 86% of the total in 1965 to just 57% of the total in 2008, the year before the Great Recession. NASA has dismantled the Space Shuttle program and stopped development of the Ares Heavy Launch Vehicle program. While some funding continues for hypersonic vehicles capable of placing payloads into orbit, we essentially depend on private companies and the Russians to supply the International Space Station with supplies. We have no plans to return to the Moon or to visit Mars.
Contrast this deplorable state with our competitors. The Russians are not much better off, with too weak an economy to permit them to both modernize their military and support an ambitious space program: they have chosen the latter. Europe and Japan have modern, capable space agencies and both routinely launch satellites and scientific missions into space; but neither is capable of independently overcoming American leadership in space, even at our current nadir. China, however, is very determined to do so and has not only set an ambitious goal of reaching the moon by 2020, but has also demonstrated the capability of achieving this goal. Chinese leaders have studied the U.S. space program from its inception and have clearly recognized the importance of it in driving scientific breakthroughs, technological innovations, and transformational product development.
I should emphasize that we do not need to view the Chinese as an “enemy” that we must challenge in space. Unlike the Soviet Union of the 1960’s, we are not locked in a titanic struggle of world views. Cooperation is possible and desirable; Chinese success in reaching the Moon should be applauded. Even so, the friendly Chinese challenge should still be viewed as a challenge: one that Americans should accept gladly and meet manfully. We are racing with our competitors to see who will discover the next great breakthrough in science; who will help discover the next leading edge innovation in products or medical treatments; who will find ways to profitably tap the limitless resources of space.
It is not as far in the future as we think. Already, private companies are considering the mineral wealth of the asteroid belt and ways to exploit it. These thoughts might go from science fiction to business fact should Americans make a commitment to colonizing the Moon and Mars in the next 50 years. That is easily achievable. In the 18th century, it took longer for travelers to reach Australia than it would for them to reach Mars today, and the challenges they faced on the long voyage and on arrival were equally daunting.
We have the technology and we have the funds, should we chose to dedicate them to this endeavor. All we lack is the leadership with the brave vision to paint this bright future for Americans and for all humanity.
10. Address climate change and overpopulation
Katrina devastated New Orleans; Sandy rocked the Mid-Atlantic States. A tsunami wrought havoc in Fukushima, Japan and provoked the worst nuclear catastrophe since Chernobyl. We are seeing the future: one of increasingly powerful and increasingly frequent natural disasters; unpredictable in their manifestation, but all too predictable in their eventuality and violence. All of these extreme variations in weather patterns, from the plague of twisters in Tornado Alley to the worst drought in 50 years, are being driven by the unknown interactions of man-made climate change.
I emphasize that the interactions are unknown: global weather systems are so complex that no computer program is powerful enough today to successfully model them. That, however, is far different than saying that climate change is in doubt. Climate change, and man’s role in promoting is, are both indisputable. Atmospheric carbon dioxide has and continues to increase far above our recent historical levels, and is driving an increase in global average temperatures.
The rise in temperatures is not uniform: there are regions of the globe that are getting colder. But on average, the temperature is rising, and weather patterns are not only changing but intensifying. Changes in the temperature and salinity of ocean currents, from the melting of the fresh water in the ice caps, is powering hurricanes and typhoons of unprecedented intensity. Rainfall patterns are shifting, leading to flooding in some regions and severe droughts in others.
The economic and human cost of these climate changes could not have been brought home more clearly to Americans this year: we suffered a record heat wave across much of the country, a terrible drought over much of the Great Plains, deadly tornadoes in Texas and Oklahoma, and then Sandy – and 2012 has not ended. The economic costs of these catastrophes will reach the hundreds of billions – yet our politicians say that curbing emissions is too expensive?
In reality, it is inaction that will cost us most dearly. We cannot assume that 2012 was an exceptional year. Assuming that there is a major hurricane, like Katrina or Sandy, and a major drought every 5 years, and we can easily create economic scenarios of total losses to the economy, as well as to human life. Curbing greenhouse gas emissions doesn’t have to be a sacrifice either: these investments can create new industries, new manufacturing and new jobs at home.
But only part of the problem is emissions: another contributing factor is population. The two are highly correlated. Higher population drives demand, which leads to more emissions. Higher demand and more manufacturing lead to hiring of more factory workers, which also drives emissions. It’s a self-reinforcing cycle. The simple fact is, there are too many people, and everyone wants an American middle-class lifestyle: with our current technology, we will quickly run out of planet.
Yet population is so delicate a subject, and so intimately intertwined with religion, that the subject is barely whispered, and is nowhere near being on the global agenda. Yet something must be done. We are caught in a dual demographic challenge: too many people, and an unstable distribution of “young” vs. ”old” countries. Overcoming these challenges will require a degree of international cooperation not seen since the Second World War.
11. The Architect of Democracy
Robert Kagan has written an insightful book on “The World America Built” in which he argues that the international order of free trade, democratic regimes and liberal norms is neither a product of human evolution, nor a guarantee of the future. It exists because the liberal market democracies of Western Europe, North America and Oceania fought for it. Through two world wars and a long cold war, it was the sacrifice born by these nations and their willingness to bear the burden of defense – and sometimes war – that allowed liberal institutions to take root and spread.
What would the world have been like had Imperial or Nazi Germany won? What if the Soviet Union had been the global hegemon? Whatever it might have looked like, it would not have been liberal or democratic.
Mr. Kagan is right to say that there is no inevitability to our world order, unlike the triumphalist assertions of Mr. Fukuyama in “The End of History”. Our world order stands so long as the balance of power lies with those who would sustain it. Should the balance of power tilt decisively in favor of the world’s autocracies, we would see the number of democracies in the world fall dramatically and the liberal regime of human rights and free markets replaced with one of state control, “order” and conformity. It has happened before and it can happen again.
Today, the United States enjoys an overwhelming preponderance of military and economic strength. But it does so because it has so many like-minded allies in key parts of the world. We don’t have to actively defend these regions and they pose no threat to us; on the contrary, they are a source of strength which allows the US to be a “hegemon on the cheap”. Canada, Europe, Japan, South Korea, Australia – these are cornerstone allies. The US also has vital security arrangements with Turkey, India, Taiwan, the Philippines, Egypt, Mexico, Brazil and many Latin American nations. Today’s world order works pretty well to make sure that even revisionist states like China and Russia play by the rules and watch their step.
It is in the vital strategic interest of the United States, and of all people everywhere who value the current world order, that the balance of power remain with the world’s democracies. Brazil, India, Turkey and increasingly Indonesia are on the side of democracy. China and Russia are both autocratic, revisionist states that have no love for the current order, Russia less so than China. Even so, the United States must make every effort to ensure the continued success and prosperity of her key allies, especially our Japanese and European who are under the most pressure.
It might be tempting to focus on our own domestic problems, to abandon an ungrateful world to its own devices. Another temptation would be to assert US military power unilaterally, disdaining the tedious and delicate negotiations needed to keep allies happy and cooperative. Both approaches would be disastrous.
America cannot and must not retreat from the world, nor can we impose our will. The United States must remain the “architect of democracy”, supporting at all times and in all ways those governments and nations that wish to give democracy a go. In the end, we must sustain the liberal international system, or see it weaken and fall.
Sources and Notes:
 Thanks to the Commodity Futures Modernization Act of 2000, which ensured that OTC derivatives, like credit default swaps and collateralized debt obligations, would not be regulated when traded between “sophisticated parties”. We all know how that turned out.
 Depository Institutions Deregulation and Monetary Control Act (1980), Garn-St.Germain Depository Institutions Act (1982), Riegle-Neal Interstate Banking and Branching Efficiency Act (1994), Gramm-Leach-Bliley Act (1999), Commodity Futures Modernization Act (2000). The first two acts led directly to the Savings &Loans disaster, which was the worst financial crisis in the US since the Great Depression, until the Great Recession.
 Story, Louise and Chan, Sewell, “Goldman Cited ‘Serious’ Profit on Mortgages,” New York Times, 24 April 2010
 Cohan, Peter, “Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP,” Daily Finance, 09 June 2010
 Smith, Elliot Blair, “’Race to Bottom’ at Moody’s, S&P Secured Subprime Boom, Bust,” Bloomberg, 25 September 2008
 Halsey III, Ashley, “Study: $2 trillion needed for U.S. infrastructure,” Washington Post, 17 May 2011
 Krugman, Paul, “America Goes Dark”, The New York Times, 08 August 2010
 Also the fifth Vice President of the United States. He died after a year and a half in office.
 Kusnetz, Nicholas, “Redistricting: GOP and Dems alike have cloaked the process in secrecy,” State Integrity Investigation, Center for Public Integrity, 01 November 2012
 Congressional Budget Office, Historical Tables, 2012 Budget
 Kagan, Robert, “The World that America Built,” Knopf Publishers, 07 February 2012, ISBN 9780307961310