Obama Unveils Three-Pronged Economic Plan

Sen. Barack Obama (D., Ill.) offered an economic address Thursday morning in New York City where he suggested a greater role for the government in stimulating the economy:

"[Alexander] Hamilton had a strong belief in the power of the market. But he balanced that belief with the conviction that human enterprise 'may be beneficially stimulated by prudent aids and encouragements on the part of the government.' Government, he believed, had an important role to play in advancing our common prosperity."

Obama believes that America has lost the "sense of shared prosperity" and wants regulation to return markets to a "fair, and open, and honest" state. To that end, Obama put forward a three-point plan.

Obama Targets Wall Street's Piggy Bank

Obama's economic reform plan begins with the premise that financial regulation is out-dated and must be modernized to address 21st-century demands. He blames lobbyists for breaking down regulations causing our present crisis:

"A decade later, we have deregulated the financial services sector, and we face another crisis. A regulatory structure set up for banks in the 1930s needed to change because the nature of business has changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework."

Obama hopes to realign the regulatory agencies. Many of the different agencies, including the Federal Reserve, Securities and Exchange Commission and Federal Deposit Insurance Corp., had varying duties before the repeal of the Glass-Steagall Act (which forbade commercial and investment banking at a single institution) and now overlap. Obama has particular concern over firms having access to the Fed lending window without sufficient oversight of their balance sheets and the possibility of the Fed playing favorites. Streamlining agencies has some merit; it may better allocate and coordinate government oversight.

Wall Street may have a problem with one point in Obama's oversight plan. He has concerns over the capital and liquidity requirements of firms and says standards have to be re-examined. Wall Street firms' balance sheets benefit -- and suffer -- from the leverage they use on capital. Bear Stearns BSC failed over liquidity concerns. Morgan Stanley MS recently announced plans to de-leverage its balance sheet, bringing its leverage ratio down to 27-1 from 32-1. It's not clear exactly how Obama's proposal would affect firms' ability to do business.

Obama also recommended creating a "financial market oversight commission." The commission would regularly meet and offer insight to the president about how the crisis might pose risks to the economy.

Obama, like Sen. Hillary Clinton (D., N.Y.), has plans to help struggling homeowners. On Wednesday, he criticized Republican nominee John McCain, saying: "[McCain] said the best way for us to address the fact that millions of Americans are losing their homes is to just sit back and watch it happen." Both Democrats have tried to paint McCain as a modern-day Herbert Hoover who won't take action to help average Americans.

Should the economy continue to falter, this charge may well stick.

Obama's plan makes an effort to help homeowners. He supports Sen. Chris Dodd's (D., Conn.) effort to create a new Federal Housing Administration program to offer incentives to "buy or refinance existing mortgages and convert them into stable 30-year fixed mortgages." In addition, he has called on lenders to begin writedowns on loan principal as many homeowners struggle with mortgages having negative equity. Many homeowners now choose to walk away from these homes.

Obama espoused several new proposals. He suggested creating a new mortgage tax incentive to help middle-class homeowners benefit from a tax write-off. Furthermore, he proposed a $10 billion fund to help first-time homeowners who got caught in the subprime mess.

Finally, Obama called for a new stimulus package to "protect families and strengthen the economy" to the tune of $30 billion. The Bush administration's package only provides for tax rebates and doesn't help those losing their jobs or struggling with housing payments. Of this $30 billion, $10 billion would go to a fund to help stop foreclosures, $10 billion would go to states to help fund critical services lost through lower tax revenues and $10 billion would go to fund unemployment benefits.