If Obama Forgets the Leviathan of Finance

The push for renewal on a global level, which the reelection of President Barack Obama and the appointment for the next ten years of the future Chinese leader Xi Jinping have led us to expect, has been almost suddenly switched off. The essential need for control of the dominant, albeit politically de-legitimized, new Leviathan of the speculative finance world — despite its being the primary, indispensable tool for solving the crisis — does not seem to be of importance for President Obama. Nor, after listening to the speech by the outgoing [Chinese] President to the Communist Party Congress, does it seem to be so for the Chinese leadership.

So a solution to the serious economic depression remains elusive for now. It is true that President Obama’s reappointment could give us hope for a substantial policy change from the United States, which, besides being the country which gave rise to the crisis, is also the country where people immediately went looking to identify possible remedies. In fact, the verbose Dodd-Frank Act, which was to reform the great American financial system and provide an example for reform in other countries, was only implemented in small part, ignoring for example the application of the so-called Volker Rule* aimed at preventing financial speculation by banks on derivatives and the creation of high-risk financial instruments.

Nor has diverse collaboration come about in this regard from other supervisory authorities, such as the SEC, which actually authorized investment banks to use their mathematical models to verify the relationship between capital and high-risk portfolio instruments, thus becoming an accomplice in causing the global financial crisis. Even if there can be no doubt that Barack Obama’s reelection — compared in this respect to the potential election of contender Mitt Romney — should be considered positive, it is equally true that the outcome of the U.S. Congressional elections, confirming the Republicans’ majority in the House, makes any attempt at a serious, concerted reform of the financial Leviathan very difficult.

It is no coincidence that the first statements of the president have been mainly directed at what appears to be the most immediate and serious political problem to be confronted, namely the so-called “fiscal cliff.” The fiscal precipice will come about if there is no intervention before the end of the year to remedy the expiration of the tax cuts that Bush introduced and Obama extended. This would provoke a significant rise in taxes that would be just as indiscriminate for citizens as it would be for businesses, large and small. This tax increase, accompanied by plans to cut public spending, would lead to a dramatic reduction in the gross domestic product, estimated at 4 percent, an intolerable increase in unemployment, a negative growth rate and an unstoppable economic recession. In short, the usual effects of austerity.

There would be problems, therefore, related to the public debt, the state budget and domestic politics, which seem far removed from any call for real reform of the current system, which enriches the sovereignty of the protagonists of the undisturbed international financial scene. It is also unfortunately the case that while President Obama announced that, as promised in the election campaign, he is going to raise taxes on the wealthy, an article in The Economist from the day before yesterday dedicated nine pages to the subject of poverty. If Mitt Romney, who candidly stated that he was not interested in the problems of the very poor, did not have anything about this subject in his plan, there was also very little in the campaign plan of the president. The problem of poverty was mentioned only one time; Obama then cautiously spoke of the poor as “those who aspire to the middle class.”** All this in a country where youth poverty is higher than in Japan, Canada and all the European countries, with the exception of Romania.

One possible reform of the financial sovereignty of the Leviathan is, in the end, delayed by concurrent declarations by U.S. authorities, led by the Federal Reserve. This has postponed decisions on the demands of the Basel Committee on Banking Supervision, the so-called “Basel III Agreement,” which requires a strengthening of banks’ core capital by adjusting it to assets weighted according to risk and possible emergencies resulting from the crisis, and which increases the systems of transparency and disclosure.

In short, the conclusion on the “Leopard”-like*** homeopathic value of the election sometimes seems very true.

If, outside of the U.S., with China still too consumed by internal problems, it is impossible at the moment to locate a global player capable of offering an exit strategy from the crisis, there is once again hope that Europe will itself be able to create a single, strong institution that is political, monetary, and fiscal, more well-anchored than the U.S. in the fight against inequality, and that Europe will become a promoter of shared global reforms. It would be a serious problem to instead avoid regulatory asymmetries between countries and surrender passively to the worst, this time deliberately globalized.

* Editor’s Note: The correct spelling is Volcker.

** Editor’s Note: While Obama did speak to this effect in the debates, this exact quote could not be verified.

*** Editor’s Note: “The Leopard” is a 20th century Italian novel that treats the topics of class, loyalty, influence, tradition, moral decadence and greed.