So Barack Obama has come around to the idea that big banks need to be made smaller and that smarter regulation (contingent capital, enhanced capital requirements for large banks, resolution authority, etc.) just won’t cut it. Today he proposed limits on market share (measured by a bank’s share of total bank liabilities in the United States) and a prohibition on internal hedge funds, private equity funds, and proprietary trading.
This is great. It means that the administration is moving in the right direction–breaking up big banks–and the president is putting his name behind it. For more on why these are good ideas, see Mike Konczal.
OK, now for the caveats.
Any such legislation has little chance of passing in this session. The (now 41) Republicans had already signaled their intention to kill the Consumer Financial Protection Agency in the Senate, and I was already wondering how the CFPA could survive; banning proprietary trading will be that much harder to pass. (I could be wrong, since theoretically Republicans should want to eliminate implicit government subsidies and increase competition; it depends on how they balance that with their determination to prevent Obama from accomplishing anything.) And if I’m right about this session, I’m even more right about next session, since the Democrats are likely to lose seats in November for all sorts of structural reasons (first midterm election, more seats up for grabs, high unemployment, etc.). That said, this is a battle for the next decade. And having Obama on our side increases our chances of winning.
But is he actually on our side? The administration is trying to spin this as something it has been considering since last summer, believe it or not, not an abrupt shift in policy. Although Obama wants to call the prohibition of proprietary trading the “Volcker Rule,” in late October Volcker ways saying quite clearly that the administration opposed him on this issue. This is an abrupt shift. And while I still welcome the shift, that makes me wonder how much of it is politically motivated. Simon argued earlier this week that the Democrats should run against Wall Street this November, and this could be what Obama is doing. Again, all good–the more visible the TBTF issue is, the more likely it is that we will solve this problem some day. But are Summers and Geithner on board, or is this a political decision coming from Axelrod that will be discarded later?
Finally, there’s the matter if the concentration limits will be strict enough and if they will be enforced. We already have a rule saying that no bank can have more than 10 percent of all deposits in the country, and that rule has been waived for three banks already. Simon and I favor strict limits and no regulatory wiggle room. There is talk, however, that the proposed size restrictions will leave the large banks as is and simply curb their future growth–which would mean, effectively, that they would have to raise the current 10 percent cap (since three banks are already over it), which can’t possibly be right.
For today, though, I’ll take it what I can get.
By James Kwak
The Baseline Scenario 
“This is an abrupt shift. And while I still welcome the shift, that makes me wonder how much of it is politically motivated.”
It was Samuel Johnson who observed that the threat of hanging wonderfully concentrated the mind.
Does it kill you, James, to know that but for the outcome of the plebiscite on health care reform recently conducted in the Bay State there would be absolutely zero chance of real financial reform?
The death of that wasteful Congressional abomination and the new push for financial reform are enormous wins for the American taxpayer and citizen. In the meantime, though, we can see what Wall Street thinks of America’s prospects without extend and pretend — Potter’s not buying, he’s selling.
OF COURSE IT’S POLITICALLY MOTIVATED!
I am encouraged that it seems Obama had been talking to Volker all along. I hardly think he called up Tuesday night and asked Volker if he could write something up in 24 hours.
It was only something the size of the Mass Senate debacle that could get him to yank the chain of the banks even this much. I really don’t think Obama has any particular affection for the banks. I think he was scared shitless about what would happen to the economy (as measured by the DJIA, at least) if he picked a couple of progressive wonks for senior positions instead of Tim and Ben last year. He couldn’t risk it. He had to appease the Street. He rode along with that as far as he could – which was up to about 9:30 Tuesday night.
As for the Republicans, I’m sure they’ll find plenty to complain about. It’s up to the Dems to pain them as Wall Street patsies in November.
Oooooh, Obama talked tough again.
Nothing will come of it. Again.
Maybe you should have been focusing on banking reform and the economy all year, instead of the day after you lost Ted Kennedy’s senate seat.
I know how this may sound, but I am coming to believe that the determination of the Republicans to prevent Obama from accomplishing anything is racially motivated. There just is no other reasonable explanation for their vehement reaction to him.
Sure! all those uninsured people aren’t a problem, and probably want to be uninsured anyway.
There are much more simple ways to limit bank size than the proposal made by Obama today. If the FDIC would simply impose a deposit insurance fee that increases as a proportion of deposits with the aggregate deposit balance a bank is insuring then there would be a built-in dis-economy of scale. One simple rule would immediately put smaller banks at an economic advantage.
The limitations on internal hedge fund and private equity fund ownership are red-herrings. Neither would prevent piling the asset side of a banks balance sheet high with what we now call “toxic assets” – they are just bad loans of one form or another.
Of course it’s political. This is a political disease with financial and economic symptoms, so any cure for the disease must be political.
Never underestimate any politician’s ability to change sides on an issue, and do so enthusiastically, if they see it as the best way to retain their position and/or fuel their ambition for a larger office…
I think its starting to happen – the great bus underthrow.
1) Politically motivated. Obviously.
2) If it needs to get through Congress it has approximately 0% chance of passing. Especially after the SCOTUS has relaxed campaign spending restrictions for corporations. Members of Congress aren’t exactly going to fall all over themselves to support a measure that goes directly against the self interest of some of the richest people in society.
Maybe. But one can certainly hope, at this point.
Don’t play the race card. That’s a cop out. I’d be far more likely to buy the fact that they’re hiking their leg and peeing on a Democrat because he’s, oh I dunno, not a Republican maybe?
Is this really an abrupt shift?
I think you are missing something by not trying to think the way the administration should think. And the way it maybe does.
Would you really come up with something like that in any public way during the confidence crisis in economy a year or even just 6 months ago?
I agree with Marian’s interpretation. Standing up the TBTF banks was, by definition, the first priority. Extensive regulatory reform would have complicated that process.
I’m sorry, but I don’t agree. There are numerous examples: Barack the Magic Negro, posters of him as an African witch doctor, the completely unwarranted characterization of him as a Marxist, a socialist, someone who “hates white people”, someone who wants to destroy the country by nationalizing the private sector, etc., etc.
There are reasonable criticisms that could apply to Obama, we have read many of them on this blog. But much of the criticism from the right has no basis in reality.
Past presidents had segments of the country who hated their policies, but there were always some issues where legislators on the other side could find some common ground with him. Not this time. The tone is different. It’s sharper, meaner, more disrespectful than before. It’s way beyond partisanship.
I think ignoring the racial aspects that have clearly always existed in our society is a cop out.
Much of the criticism of Bush had no basis in reality. Welcome to payback.
We had a dozen major campaign promises that went straight under the bus as soon as Obama was inaugurated. Anyone who thinks he’s suddenly found a sincere desire to do the right thing is delusional. He will do the least amount necessary to appease the political forces that threaten the powers that be, i.e. the guys who Obama is fronting for. That’s how it looks from the cheap seats. There’s enough of a pattern established that I think we can reasonably extrapolate his future action. Or should I say future inaction.
It is not only politically motivated, it is politically hedged with soft wording and escape clauses all over the place. But we must push, push push him. Even McCain knows banks should be split up. Nothing could be better than have the Dems attacking banks and bank structures and have the GOP defending the banks. This is a once in a lifetime opportunity to move the beast in the right direction. The president and the Dems will be slow to respond, but we must keep the pressure on.
Bust up the banks, limit the influence of big finance and attack the insurance companies and big pharma over the failure of health care reform and the extension of health care coverage. Most of all, beat back the bullshit that this adminstration is responsible for the deficit and engaged in reckless spending. But this won’t happen on its own and it won’t happen if we all sit at our keyboards at night and congratulate ourselves on how smart we are.
We must get the message out, NOW, by raising money, speaking at whatever forums we can access, and hounding the airwaves. The window is closing (as Mass. taught us) and if the forces of evil win next year, the future is dark indeed. Any takers?
Examples?
Call me cynical Mr Kwak, but one little news cycle and a bunch of words spouted by some politician does NOT mean there will be any meaningful change! The words are nice and long overdue – but it is deeds that force real change, and until there are actual deeds, actions, that hold the FAILED TBTF oligarchs, and their FAILED predatorclass managements, and their FAILED models and criminal PONZI schemes accountable to the rule of law, – all we have is the noxious and meaningless hot air of words.
At last! This is entirely the right move and I sincerely hope that it is passed in full and not watered down. Now perhaps we can start to have a move to a real recovery and not a reinflated bubble. This needs to go international and I am delighted that the opposition party in the UK has also welcomed it. Over mighty barons in other industries should also beware as noted above – big pharma for example. Incidentally Obama is by no stretch of the imagination a socialist, this label so widely used in the US seems to be totally misunderstood. We have plenty of experience of socialism in Europe to spot one!
When he replaces Geithner and Summers we’ll know
that he is serious. Till then it’s just more talk.
And besides, given the serious problems that have been festering for decades in this country that are in dire need of sustainable resolutions, the last thing we need are childish games of tit-for-tat, and immature desires for “payback”.
We’ve always had problems to solve, but there are a couple of big ones that are soon coming to a head. You’re either serious about helping to solve them, or you’re not. Which is it?
The criticisms of Bush were based in reality. It was Bush that was promoting an alternative reality–one we’re still stuck with.
The insane rhetoric coming from Republicans about the character of Bill and Hillary unrelated to public policy is a lot like the insane rhetoric about Obama. It’s not just a race issue. It’s THEM.
So long as people–on both “sides” of the political divide in fact– are distracted by this tactic, they’ll continue doing it.
Interestingly, speaking of polls, I was watching the Ed Show on MSNBC tonight, and Ed Schultz ran a poll as to whether Geithner, Summers and Bernanke should be kept where they are. I know that it is largely a matter of viewership, but his poll (texting) ran 90% to 10% against. I believe that is somewhat emblematic of the public/voter sentiment against this economic team, and that at the very least, Summer and Bernanke will be gone soon. The polls largely reflect that Republican resistance to regulation will be met with public hostility, and I’m not sure that a complexity attempt will be enough to keep real reform from happening. The CFPA is almost certain to survive, or, if the Republicans succeed in killing it, it’s death could also be theirs in the fall elections. The Democrats will run on this and could win if the Republicans continue to oppose really strong financial reform.
Obama can make all the populist speeches he wants but as long as Congress and the White House are controlled by special interests and lobbyists, financial services reform (or health care, or campaign finance) will remain a pipe dream. Both the right and left portray themselves as the good guys and the other side as the villains, perpetuating the myth that our current political system is a modern-day morality play. In reality it best resembles a prison gang rape where Democrats and Republicans, whatever party is in power, take turns forcing us to grab our ankles and make us smile in the process.
It’s absolutely politically motivated. The administration and the legislators are starting to feel the sting of being unable to control the American public discourse on a far more divisive issue (health care). That’s exactly why, according to http://www.newsy.com/videos/change-of-plans-obama-shifts-focus, The New York Times called big banks “the perfect foil” for this administration. Outside of terrorists, there may not be a politically safer group to attack, and even the war on terror is subject to the political minefield.