Obama disappoints on bank reform

January 22, 2010

— Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission. The views expressed are his own. —

President Obama announced he wants to prohibit banks from forming hedge funds, private equity funds and trading securities on their own accounts, and he wants to limit the size of banks and financial institutions generally.

Hedge funds, private equity funds and proprietary securities trading did not cause the banks to get into trouble, and the size of banks did not cause the credit crisis.

Banks, small and large, failed or required bailouts because of poorly considered loans, and the kinds of engineered products that were created from those loans by non-bank entities.

Collateralized debt obligations and swaps created and marketed by non-bank financial institutions, such as Lehman Brothers and Goldman Sachs, compounded the errors of foolish bankers. Later, Goldman Sachs and other financial institutions became banks to access inexpensive credit from the Federal Reserve, but those decisions could be reversed if bank holding companies are not permitted to trade on their own accounts.

Prohibiting securities trading by banks and limiting the size of the banks would not keep those mistakes from happening again.

Many smaller banks invested in risky securities-commercial mortgage backed securities. They did that and could do it again without a proprietary trading arm.

Large banks failed or required bailouts, because they continued to hold residential mortgages, residential mortgage back securities and credit card and auto loans that soured. Bad loans will sink a bank, regardless of whether it is owned by a holding company that trades securities on its own account.

The president’s statement on bank policy does not demonstrate a clear understanding of the causes of the credit crisis, and more importantly, it does not chart a clear path to reforms that would keep another crisis from occurring.

The president’s statement appears intended to distract public attention from record profits and bonuses on Wall Street, and from his political troubles.

Coming on the heels of news that 450,000 Americans continue to file for first time unemployment benefits each week, and the Democrats loss of a special senatorial election in Massachusetts, the President’s Obama’s statement on bank reform appears political and disingenuous.

One year after taking office, the administration should demonstrate a better understanding of the causes of economic crisis and articulate confident solutions for unemployment.

The Obama team simply does not have a grasp on the nation’s economic problems.

2 comments

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if krugman and reich would replace geithner and bernanke, the administration might be able to “demonstrate a better understanding of the causes of economic crisis and articulate confident solutions for unemployment.”

now, i don’t know how well volcker, krugman, and reich would work together; but that could be a dynamite economics team.

obama, are you listening?

we must get goldman sachs out of government!

Posted by jborrow | Report as abusive

I sense more and more that we are dealing with amateur hour not on one front but on many. The most stinging point made here is that the “President’s statment appears intended to distract public attention from record problems and bonuses on Wall Street, and from his political troubles.” It does appear disingenuous. It comes from far behind the curve, for sure. It’s easy to see that unless Obama changes fundamentally, he’ll be one-term and “the agenda” will be set back very far.

Posted by JJJohnson | Report as abusive