The horizon is not so far as we can see, but as far as we can imagine

A Smart Proposal From Volcker and Obama

Guess a kick in the head sometimes knocks some sense into people.  I confess I’m surprised.  Maybe they can learn.

The White House wants commercial banks that take deposits from customers to be barred from investing on behalf of the bank itself—what’s known as proprietary trading—and said the administration will seek new limits on the size and concentration of financial institutions.

… Banks shielded from risk through federal-deposit insurance, or aided in financial crises by low-interest loans from the Federal Reserve Board, would no longer be allowed to engage in trading unrelated to their customers’ interests, one senior administration official said.

Under the proposed rule, commercial banks would be prohibited from owning, investing in or advising hedge funds or private equity firms. Bank regulators would not be simply given the discretion to enforce such rules. They would be required to do so.

Administration officials said they also want to toughen an existing cap on bank market share. Since 1994, no bank can have more than 10% of the nation’s insured deposits. The Obama administration wants that cap to include non-insured deposits and other assets.

This is the right thing to do.  I agree with Johnson that they should also launch anti-trust investigations of the banks.  I would add, that in addition, they should launch criminal fraud investigations into bank behaviour leading up to the financial crisis.  Keep these people so tied up, and get them so scared that they want peace at any cost.

As Johnson notes, it seems unlikely this can pass the Senate.  But if Obama wants to not have a disaster in the 2010 elections, he should make these sort of actions the centerpiece of his administration for the next year.  Run against the banks, and go hardcore populist.  Because if he doesn’t, the Republicans will go faux populist, and win on it.

We’ll see, in the next few months, how serious Obama is about taking.  Is this for real and will he pursue it with all his might, making a fight of it, or he will pursue it like everything else he’s done—half-heartedly, and for show?  Will he push it hard in the Senate, or when the Senate balks, will he shrug and say ‘whatever Ben Nelson wants?”

I’m not optimistic, but at least, in a pleasing change from most of his behaviour since the election, Obama is talking about doing the right thing.

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14 Comments

  1. BDBlue

    The way it’s crafted would exempt Goldman Sachs. Yves Smith:

    Yves here. And what, pray tell, is this about?

    Goldman Sachs – which runs a large proprietary trading business and which reports results on Thursday – will be watching the details closely, but the measures are more likely to threaten institutions whose operations are large and span commercial and retail operations as well as trading for their own benefit.

    Yves again. Goldman is every bit as backstopped by the government as a depositary. The idea it should get more favorable treatment is absurd.

    And you have the AIG and LTCM precedents. Firms outside the regulatory cordon sanitaire were still enmeshed enough with the key international capital market players (now essential to the functioning of the global economy) that entities largely exempt from regulation put the entire financial system at risk. Unless you ALSO limit how backstopped firms are permitted to do business with risk-taking firms, you have not solved the problem, just shifted how and where it will eventually show up.

    So there may be less to this than it sounds like, although the underlying idea is a good one.

    Then there’s the issue that even if the proposal somehow turns out to be meaningful – instead of just appearing meaningful – whether Obama will, or even knows how to, fight for it.

    And I think Obama has often talked about doing the right thing – closing Gitmo, holding banks accountable, giving everyone access to affordable healthcare – it’s the doing that been the problem. I agree this could be a step in the right direction, but what I fear is that the real lesson to them from Tuesday is to simply appear to be harder on banks. I confess I doubt at this point if Obama has it in him to truly be hard on banks, but I’d love to be proven wrong.

  2. BDBlue

    D’oh, I meant to say the way it’s crafted may exempt Goldman Sachs.

  3. Ian Welsh

    Well, definition of bank should include having access to Fed money like a bank, yes.

  4. BDBlue

    Oh, I agree, Ian. And that’s what it should be. If somehow Goldman gets exempted from this at the outset, then that will be a huge tell, IMO, as to whether Obama is serious (or simply playing serious on tv).

  5. par4

    Talking points nothing more. The Dems are incapable of passing or enforcing any regulation. We are fucking doomed to three more years of lame duckness then the ‘FUN’ really starts.

  6. Mad Hemingway

    I shall believe it when I see it enacted.

    Oblahblah’s record indicates otherwise.

  7. b.

    Approval On Delivery.

    Obama is Liebermann Jr. – another two decades in the Senate would have demonstrated it.

    This is a man who has no problems implementing “compound stress” torture per AFM, has no moral qualms about proposing infinite detention and a “Jim Crow” approach to prosecution and trial, how has appointed an improved “Alberto Gonzalez” as AG and given his “Beholder” directions – publicly – and who has, from Day One, prosecuted a don’t-ask-don’t-tell-no-shame-no-holds-barred approach to covering up torture and homicide, making himself an accessory after the fact while proposing to co-opt us all into his improvements on Bush improvisations by finding a “legal” “framework” “compatible” with the constitution and “values”- all the while douling the numer of legally unaccountable PMC’s operating e.g. “extralegal” assassination by remote control.

    The most telling moments are those where B. OrgBama indicates he might have to go through the moves of another domestic incrementalist two-step to appease a misguided base, and his critics begins to applaud the man for going in the “right direction” – a man who seems completely devoid of a moral compass. But then, in that respect he is quite representative.

    Hostis humani generis.

  8. Greg

    I am glad you finish by saying essentially, “Watch what he does, not what he says”, because for me, this is just more BS from Obama.

  9. tjfxh

    Warren Mosler’s 11 steps to fix the economy based on MMT aka Neo-Chartalism.

  10. Andrew M

    Ian, you seem to be suggesting that the only way to implement the necessary reforms in the financial industry is by playing chicken with the banks. The problem is I don’t think the banks will blink. The elites have so much power and their interests are so intermeshed that if you cut off one head two more will grow in its place. Declare war on the banks or the health insurance industry, try threatening them with criminal investigations and the like, and not only will you have to confront a massive media backlash (in both advertising and editorials), but the party will lose its main sources of funding, the Congress will turn on you, there will be cabinet resignations, leaks, Generals will start questioning your leadership, the economy will start tanking even more than it is, and your Presidency will effectively be over. You can’t count on populist sentiment to carry you through because it’s too easily manipulated by those with money and influence. So as much as I hate to say it, Obama really has no choice but to try and implement reform in as non-threatening a way as possible. Whether that will be enough is doubtful. (And let’s face it, Obama would never have been elected if the elites thought he was going to cause them trouble. He’s just there to clean up their mess.)

  11. Andrew M

    Oh, and the judiciary isn’t going to help you out either.

  12. I am absolutely convinced that, at the end of the day, we shall see sweeping changes for banks written into law. I fully expect that they shall be required to purchase a new brand of broom.

    – Badtux the Cynical Penguin

  13. As I noted in a recent post, what will more than likely happen is that Obama will give a big speech, with lots of pretty rhetoric and then wait for the Senate to kill it. Just like HCR. No leadership Obama.

  14. Ian Welsh

    Andrew,

    they’d be bankrupt in less than a year, and out of business. You just do the lending through the credit unions, banks you take over (you can take over Citigroup and BoA almost immediately, there is no question they are bankrupt). Lending would actually increase.

    Granted, a year may be too long, which is why people like me were screaming at Obama to do this first thing when he took power.

    Sometimes if you don’t do the right thing in time, it really is too late.

    Still, I’d take the chance. Might as well go down fighting, because you might win. If you don’t, you won’t win for sure.

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