Thursday, January 21, 2010

Baby Steps

President Obama is, finally, actively talking up steps to rein in the financial industry; first the bank tax to “recover the bailout money,” and now what is being hailed as a “modern day version of Glass-Steagall,” a law prohibiting banks from trading using their client’s money. My thoughts on the bank tax is that it has been more for swaying public opinion than anything else, as it isn’t an amount that is significantly going to affect banks or the government deficit, and doesn’t address the problem of Wall Street behavior.

I regularly read two financial writers, Mish and Market Ticker. Both of them write in laymen’s terms most of the time, and when they do I quite often can follow what they are talking about. Both are “doomsayers” to a degree, so I tend to read them with a salt shaker handy, but they provide useful insight as to how the financial industry works. If you don’t think that the politicians of both parties are obfuscating like crazy, you need your head examined.

(Mish had a piece yesterday on the San Diego pension crisis, in which he commends Donna Frye and says she should run for mayor. He may know finance, but he certainly doesn't know Donna Frye.)

Anyway, Mish says that Obama’s latest effort misses the point, while Market Ticker says it is on point and very much in the right direction. I’m with the latter, but I am of the opinion that it is another of Obama’s baby steps. This is timidity when bold action is seriously needed.

The proposal only requires that banks not be allowed to trade with their client’s money, it doesn’t prevent them from risk-taking in general, and it applies only to the very largest handful of banks, when it should apply to all deposit banks as Glass-Steagall did. It does not prevent deposit banks making loans from selling those loans and then counting them as assets rather than liabilities. It leaves un-addressed a vast array of problems of oversight and enforcement.

Baby steps are better than nothing, of course, but this was a candidate whose theme was “audacity.” We have settled on a smaller-than-desired stimulus, we are buying a crappy compromise on health care reform, and now we are approaching financial regulation reform with timidity and trepidation. Determined and steadfast on doing the hard things he may be, but this approach of doing them piecemeal seriously risks leaving many of them half done. Where is the “audacity” we were promised?

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