James Pethokoukis

Politics and policy from inside Washington

More on the new Obama bank plan

Jan 21, 2010 14:18 UTC

Mark Calabria of Cato, a supersmart observer of the financial sector in DC, gives me his two cents:

I find it hard to believe that the govt has any clue as to what correct size and level of trading is for banks. Sounds like nothing more than cheap politics.

Ex ante, no one told Bear was too big. So is the size limit going to be even smaller than Bear?

Obama misses one reason for banks becoming so large: their fund advantage due to “too big to fail” – if he were serious he’d come up with a plan to end too big to fail, rather than a plan for permanent bailouts.

And where’s the break-up plan for fannie and freddie? Just seems like just picking winners and losers based on politics.

I don’t see it going anywhere in the Senate [though I'm] not completely ruling it out. House could easily pass something so stupid – it is the House after all.

It does complicate financial reform – Obama might just be killing financial reform – hard enough time reaching agreement.

COMMENT

Taxes should be paid by all for our shared services: police, courts, military etc. We can’t have our own armies or competing courts and police departments. This is the role of government. “Fairly” raising those taxes will always be contentious. Our current byzantine system screams for reform. The “bank tax” is just the latest example of how far off course Washington has gone. Taxes are being wielded as clubs to inflict punishment on those out of favor with the current group of tyrants.

Through “sin” taxes, corporate taxes, “windfall profits” etc. we demonize profits and undermine the capitalist system that has put the US on top. If we go along with this we allow the left to imply that profits are immoral.

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Nicole Gelinas on the new Obama plan

Jan 21, 2010 13:27 UTC

She emails me on the Obama plan to limit bank activities:

1) I think that they are now panicking and veering from solution to solution. They will roil the markets and just make themselves panic more. Politically, i’m not sure. It will be hard for republicans to be against this, just like it is hard for them to fight the bank tax. Although if markets fall by hundreds of points, it gives the GOP an opening to say that Obama doesn’t know what he’s doing.

2) As for the merits – the problem is, Bear and Lehman didn’t have insured deposits, didn’t have recourse to the Fed, etc., but still posed significant risk. Why? Because by securitizing, derivative-izing and short-term-izing all manner of long-term debt, non-commercial banks made the economy’s store of credit much more vulnerable to market exuberance on the upside and panic on the downside. Mortgage and other credit depended at the margins not on bank balance sheets but on speculative demand.

3) To deal with that, I think we need consistent (and likely higher) margin requirements, capital requirements, clearing rules, etc., no matter who is holding/trading the debt. That would protect the economy more by putting a buffer between the pure, raw market and these debt instruments, just as we did long ago with equity markets.

4) I fear that if we curtail the big banks without doing these other things, the risks will just move, and people will continue to move their savings accounts into money markets to fund these risks. In fact, that is why we got rid of glass-steagall on the first place – to let banks compete fairly with the non-banks that had stolen their business.

5) So, do the margin and capital stuff to recognize the world we live in today … Doing that will make the economy better able to withstand financial failure, anyway, and the market, knowing this, will bring the institutions down to manageable size.

Obama escalates his War on Wall Street

Jan 21, 2010 13:14 UTC

Obama’s plan to limit risky activities at big banks is more about forcing Republicans to take tough votes than preventing another credit meltdown.The Volcker Plan was already rejected by the WH econ team (Summers, Geithner) and this is being pushed by the political team (Rahmbo, Axelrod) in the wake of the Massachusetts Meltdown. (In fact, this may help tamp down pressure from congressional Dems to dump the econ team.)

The WH can’t trumpet the economy, can’t trumpet healthcare, so Plan C is to go after Wall Street and make the GOP look like its best friend. Who cares that some of the worst problem children of the financial crisis were relatively small and undiversified? Wasn’t it regulator pushing for Wells Fargo to absorb Wachovia, and BofA to absorb Merrill? But I think the Dems will be surprised at how many GOPers might go along with this, starting with John McCain who has already advocated the return of Glass Steagall. But he will be far from the only one.

COMMENT

Maybe I don’t really understand what Glass Steagall was all about, but I’m pretty sure I understand that we didn’t have a meltdown as humongous as 2008 when it was in effect. And I also wonder if 2001 wasn’t also partially a result of it not being in place.

I’m a big free-market guy, but it sure seems to me that doing away with that act was a factor in the toxic mix of 2008. It certainly didn’t start the whole mess. The government did that. Thanks Barney, Chris and Franklin. But letting the riverboat gamblers get their greedy hands on mom and pop’s savings sure had something to do with it.

Gramm made a mistake, and it hurt the country.

I’m not with the idiot in the White House on much, but this is one situation where he has a point. Of course, he couldn’t care less about helping the country. He is only playing his class warfare games because his pants have been pulled down on every other idiotic Marxist scheme he has tried so far.

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