Bottom-up Financial Reform

The financial reform bill recently signed by President Obama will attempt to attack numerous regulatory gaps and enforce new consumer protections to prevent the next global economic crisis.

But consider this thought from historian Niall Ferguson in his book "The Ascent of Money" (which, by the way, was written before the worst of the financial crisis hit):

"Politicians, central bankers and businessmen regularly lament the extent of public ignorance about money, and with good reason. A society that expects most individuals to take responsibility for the management of their own expenditure and income after tax, that expects most adults to own their own homes and that leaves it to the individual to determine how much to save for retirement and whether or not to take out health insurance, is surely storing up trouble for the future by leaving its citizens so ill-equipped to make wise financial decisions."

The financial institutions who duped unassuming home buyers into taking on mortgages they couldn't afford and the regulators who failed to identify the risks of doing so are certainly to share the blame for the recent economic turmoil. But a major missing piece in the recent regulatory reform bill, and in the general conversation about righting the economy, is an effort to improve basic financial and economics education - something that should be part of every primary high school and college curriculum. For most Americans, this education once came in the home, with parents teaching children about saving money, living within one's means, earning before spending.

But the expansion of credit over the last two generations has complicated this message: Spend, so long as you can pay the interest. Living beyond one's means is now possible - indeed a miracle of credit - but has created a sort of financial overconfidence in society.

In the principal-agent failure that took place in the recent crisis, the "principals" (bankers, etc.) with access and financial sophistication far above that of the average person were able to manipulate finance to make enormous profits, all the while knowingly risking stability of the financial system that enabled such tactics.

The new reforms notwithstanding, it is difficult to assume these mistakes won't happen again when the "agents" in society, ranging from local police pensions funds to average Joes, continue to be ignorant of the rapidly evolving world of finance.

The Romer Aftermath

The recent departure of Christina Romer signals a troubling future for the Obama Administration's economic policy team -- and does not bode well for the president's party before the crucial midterm elections this November as the American public grows weary with the nation's slow economic recovery.

After his election, the president was criticized for his selection of Washington has-been and politically connected Larry Summers and New York Fed boss Tim Geithner as his main economic policy henchmen. But he balanced these appointments with solid choices in Peter Orszag, former head of the non-partisan Congressional Budget Office, to head up the president's budget office (OMB), and Romer, an academic economist respected for her expertise on recessions, to run the Council of Economic Advisers (CEA). Obama also tapped former Federal Reserve Chairman Paul Volcker as an adviser, though Volcker's role in economic decision-making is not quite as clear or concrete. Orszag and Romer are now gone, both for different reasons.

Though Romer has denied it, it appears the CEA's role in economic policy advising was largely minimized with the presence of Summers, whose position , created ad hoc, seems to conflict the responsibilities of other officials such as Romer, whose role as chief economic adviser to the president was clearly defined.

Despite his many policy successes, President Obama has still yet to send clear signals to the markets as to what his economic policies mean for the American economy, as well as who is informing his policy-making. With Romer's departure, it has become more clear that certain heavyweights such as Summers are pulling more strings, while other advisers may be cut out of the process.