NEW BANKING REGS A BOON FOR MAIN STREET
In the midst of doing a lot of things wrong, the Obama administration appears to be about ready to take some steps in regulating the big banks on Wall Street that, if the details are carefully drawn, will make our financial system more secure while reining in institutions that were determined to be “too big to fail.”
On Thursday, Mr. Obama proposed a plan that would prevent banks that receive a federal backstop from investing their own money in financial markets—what is known as proprietary trading. He also pushed for new limits on the size and concentration of financial institutions. Both moves echo the Glass-Steagall Act, the Depression-era banking curbs that was repealed in 1999.
The proposal marked the return of Mr. Volcker to center stage in the Obama White House. The 82-year-old chairman of the president’s Economic Recovery Advisory Board consulted closely with Democrats in the House and Senate as they drafted their proposals to address “too big to fail” entities, referring to financial behemoths whose collapse might bring down the economy. Mr. Volcker spoke frequently with Mr. Obama as well.
But he faced a philosophical divide with others on the economic team.
The Geithner-Summers axis in the White House has been opposing the virtual re-imposition of Glass-Steagall for months. This decision by the president makes me think that one or both of them is on their way out - and soon. Geithner is the logical choice to take a long walk off a short pier, having angered just about everybody but executives who benefited from his bank bonus policies.
My guess is the ax will fall right before the State of the Union speech, perhaps as soon as this weekend. Obama will use SOTU to probably ask for a fresh start from the American people and he’s not going to be able to do that without some heads rolling - especially among those who have been responsible for implementing his economic policies.
The experiment of having a financial system free of Glass Steagall constraints has failed. Jim Manzi at American Scene, in an excellent summary of the new regs, explains why:
Finance professionals, like members of all occupational categories, attempt to build barriers that maintain their own income. One of the techniques used is to shroud what are often pretty basic ideas in pseudo-technical jargon. The reason that it is dysfunctional to have an insured banking system that is free to engage in speculative investing is simple and fundamental. We (i.e., the government, which is to say, ultimately, the taxpayers) provide a guarantee to depositors that when they put their savings in a regulated bank, then the money will be there even if the bank fails, because we believe that the chaos and uncertainty of a banking system operating without this guarantee is too unstable to maintain political viability. But if you let the operators of these banks take the deposits and, in effect, put them on a long-shot bet at the horse track, and then pay themselves a billion dollars in bonuses if the horse comes in, but turn to taxpayers to pay off depositors if the horse doesn’t, guess what is going to happen? Exactly what we saw in 2008 happens.
If you want to have a safe, secure banking system for small depositors, but don’t want to make risky investing illegal (which would be very damaging to the economy), the obvious solution is to not allow any one company to both take guaranteed deposits and also make speculative investments. This was the solution developed and implemented in the New Deal. We need a modernized version of this basic construct, and as far as I can see, this is what President Obama has proposed.
Glass-Steagall put up a wall between commercial banks and those banking institutions that make their living on Main Street. What was seen as an antiquated, outdated notion in 1999 when it was repealed, makes a lot more sense in retrospect. The deregulators forgot one gigantic truth about human nature; we are a fallen species, and if an opportunity presents itself to aggrandize one’s own wealth and power at the expense of another, few will resist such temptation.
Manzi’s point about risk is also well taken. We cannot overregulate to the point that risk is discouraged - especially in the competitive global business environment we find ourselves today. Intelligent risk taking is the essence of entrepreneurship and the government will have to walk a fine line between mandating responsible behavior by big investors while still allowing the magic of the market to bring new products and new ideas to the fore.
While some of the administration’s rhetoric on this issue has bordered on anti-business, the political ramifications of slapping Wall Street with new regs that will force them to act more responsibly to the economy as a whole are profound. Manzi again:
The political aspects of such reform are compelling. People are disgusted at recent bank bonuses. I’m a right-of-center libertarian businessman, and I’m disgusted by them. Make no mistake, many banking executives right now are benefiting from taxpayer subsidies. Even if they pay back the TARP money, the government has demonstrated that it will intervene to protect large banks. This can’t be paid back. And this implicit, but very real, guarantee represents an enormous transfer of economic value from taxpayers to any bank executives and investors who are willing to take advantage of it. Unsurprisingly, pretty much all of them are.
The “populist” observation that the fact of a bunch of well-connected guys each pulling down $10 million per year while suckling on the government teat constitutes almost certain evidence of self-dealing is accurate, and all the fancy finance talk in the world can’t get around it. President Obama has a clear political incentive to pursue this proposal. I assume Republicans will see that they have a clear political incentive to go along, rather than standing up for such a situation. Hopefully, this will create the political dynamic that will allow real, positive reform.
If the result of these regs is that we never hear the words “too big to fail” again, that will be fine by me. I am a little more convinced a year later that the intervention by government at the time was at least partly necessary, although I ask would it have been possible for the government to have tried a little harder to effect mergers and controlled bankruptcies rather than shelling out such huge amounts of taxpayer dollars. We’ll never know, which is why creating a regulatory regime to make sure that we never - ever - put the taxpayer in that position again is of paramount importance.
The proposed regulations appear to be a positive step. In fact, these things seem like experential common sense. While, these appear to be good regulations for the long term, there are short to mid term issues that need to be addressed. The primary problem right now is the banks aren’t lending like they should be. Something needs to be done to get them to lend again. Perhaps tax credits or other tax incentives to the banks might work here.
Comment by B.Poster — 1/22/2010 @ 10:16 am
Rick,
3 simple reasons why re-instating Glass-Steagall type rules will fail huge:
1) Our Senators and Representative are corrupte. Thus, any rules they pretend to lay down cannot be trusted to favor our citizens. Barney Frank, need I say more.
2) As you say, many of us succum to our lower-darker side. However, the same fools in #1 pile up so much red tape that criminals don’t get stopped in their tracks with laws that are already in the books before it’s too late. Barney Frank, need I say more.
3) President Obama does not know beans about our financial system in the USA. Further, he believes capitalism is flawed when no other single system has raised up so many from poverty in every aspect of the human existant.
Give me a pro-USA President and I’ll listen. This guy and those he’s surrounded himself with are nuts.
Comment by Vic Hernandez — 1/22/2010 @ 10:25 am
Rick -
Many of us complain that no matter what Obama does, it will never be enough.
Vic, need I say more?
JS
Comment by JerryS — 1/22/2010 @ 12:55 pm
pardon me while i pick up my jaw from the floor! thanks for continuing to be a voice of reason, rick.
Comment by brooks — 1/22/2010 @ 12:58 pm
It is amazing to me how people can be so ignorant of simple economics. Reinstating Glass-Stegall will be an economic disaster of epic proportions that will set our recovery back for a decade or more.
Comment by Sal — 1/22/2010 @ 1:59 pm
Sal -
Sure. Because repealing it created such a positive result.
It’s amazing to me how many people can be ignorant of the facts before them, based on just the past several years.
Repealing Glass-Stegall nearly caused the collapse of our banking system, or are you one of those people like Ben Stein who thought everything was fine nearly to the bottom?
Comment by JerryS — 1/22/2010 @ 3:16 pm
Sal sez:
“simple” economics? ahahahahaha
good one!
Comment by brooks — 1/22/2010 @ 4:01 pm
@brooks:
Sure, its simple ecconomics —
Utterly unregulated capitalism = good
Any limits or control over the market = bad
See? Simple as pie. Not practical. Or viable. And guaranteed to end in a metaphorical mushroom cloud as history endlessly proves time and time again . . . but its simple. You can’t deny that.
Comment by busboy33 — 1/22/2010 @ 5:05 pm
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Pingback by AHL announces suspension « Ahl News | San Antonio Rampage AHL Announcer — 1/22/2010 @ 5:46 pm
Given that guessing wrong would have meant financial Armageddon, the high flying crooks making out on the way up and the way down with just have to be something we live with.
Only the most shrill Republicans think Obama came into office wanting to own General Motors. Just as that same shrill contingent believe the banks have been nationalized all according to some super-secret socialist plan.
Must be lonely being a voice of reason.
Comment by Richard bottoms — 1/22/2010 @ 8:41 pm
#5:”simple economics” indeed…
You may want to look at:
The Depository Institutions Deregulation and Monetary Control Act of 1980, signed into law by Carter.
The Depository Institutions Act of 1982, signed into law by Reagan.
In 1988, the Basel Accord, Reagan.
U.S. Commodities Futures Trading Commission (CFTC) of 1989, and the exemption of swaps and derivatives from all regulation.
(…a Phil and Wendy Gramm production). Mrs. Gramm later went on to a seat on the Enron Corp. board as a member of its audit committee.
1998, Glass-Steagall and the Bank Holding Company Act of 1956 were scrapped by the Gramm-Leach-Bliley Financial Services Modernization Act. (Travelers purchase of Citibank played a role here).
Then in 2004, the SEC ruling on investment banks and determination of net capital.
You could also look into the deregulation of the S&L’s in the late 70’s and 1980’s, the S&L failures of the 80’s, Enron, and start adding up what all of this deregulation has cost the American taxpayers in the last 30 years. It’s a little complicated, but it’s all right there…draw your own conclusions. Dee
Comment by Dee — 1/22/2010 @ 10:07 pm
As I understand the Bank Bailout,the majority of banks were in no trouble and were required to take the money so as to not single out the Bank(s)that were weak. Further, the weakest big bank was Citi Group - formerly run by Democrat insider Robert Rubin. The banks have paid back the money - with the exception of Citi Group. You know, if I were a suspicious soul, I’d believe this entire bank bailout dog and pony show, was a bailout of the Dems old friend at Citi, disguised as a general bailout. But perhaps I just have a suspicious mind.
Question? Are the Banks risking their money in Hedge funds, the depositors money, or a combination of both?
Comment by Mike Giles — 1/23/2010 @ 11:40 am
If only Obama could learn a little tact.
Scaring Wall Street and driving the market down 5% in 3 days with an announcement that could have been delivered in a more diplomatic manner only reinforces the view that the President is an incompetent idiot.
Comment by Neo — 1/23/2010 @ 7:57 pm
I’ve got to agree with Rick on this one. Some form of regulation along the lines of the original Glass-Steagall Act(s) is necessary. But Vic’s point about this very corrupt administration figuring out how to line their pockets is frightening. Obama’s fees on some, but not all banks is almost a bill of attainder.
Comment by Eno — 1/24/2010 @ 11:14 am
Neo -
When Obama took office, the DOW Jones average was at 8218.22.
Today, it’s at 10172.98.
By my calculations that’s a one year return of 23%. Pretty good for an incompetent idiot.
You have to do better than put out a fact that is easily refuted when put into context. Anyone worth a damn knows the stock market goes up and down on a daily/weekly basis, and what matters is the trend.
Take a look at the one year trend here: http://www.google.com/finance?client=ob&q=INDEXDJX:DJI
Comment by JerryS — 1/24/2010 @ 2:49 pm
There are no banks that are too big to fail. They should have been liquidated as allowed for in bankruptcy and all the executives fired. It would have been painful but we’d be done talking about them by now and moving forward. Same with GM and Chrysler. Instead we’re going to have zombie banks and auto manufacturers with more and more federal intervention.
I remember when Moran tried to convince me that the federal government under Obama was NOT trying to take over the auto and banking sectors.
Comment by Locomotive Breath — 1/25/2010 @ 6:24 am
I don’t know about trying to take over the auto and banking industries, but we have begun the long walk back from 30 years of mindless deregulation in the banking and financial industry…and the next thing should be the reversal of the disasterous trade and tax policies that have almost completely destroyed American industry and all of the jobs that went with it. Dee
Comment by Dee — 1/25/2010 @ 6:58 am