This week, President Obama proposed regulatory changes that would limit big banks, implicitly those that received the guarantee of a government backstop during the crash last year, from investing for profits using their own hedge-funds or proprietary trading desks. This would be an excellent first step in reining in the power that the JP Morgans and Goldman Sachs of the world wield over our economy and political landscape. It is unfortunate that Obama waited 12 months before listening to Paul Volcker, losing precious political capital in the process. 12 months ago, the banks were beholden to the President and the American people. We essentially owned them and should have taken steps then to limit their power.
Instead, we let them pay back TARP and gain monstrously atrocious profits this year, making money by sucking cash from the tit of the Federal Reserve and refusing to then lend it out to the people who actually needed it. The banks are now emboldened to go right back to business as usual as they came through 2008 learning only the lesson that the government will make sure they do not fail no matter what the consequence. They have not been punished, not even reprimanded for behavior that sucked the life out of the American and global economy.
“While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse,” Mr. Obama said. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout.”
This is exactly right, something that is a direct result of not reining in the banks 12 months ago. Now, the regulation has little chance of emerging from Congress with any teeth. It will die a death of 536 pricks, bled to death on the floor of the institution created to represent the people.
Of course, proprietary trading wasn’t the cause of the financial collapse, at least not the root one and that is a point many on the right are making now. But this isn’t designed to fix the problem, it’s a first step down the road of reforming the entities that currently have all the power in the American economy. There are those on the right who will moan about frightening the stock market but the market needs to be frightened because it is currently nothing more than a Ponzi game played with our money. Rising from the depths of last year inside of 12 months during the worst economic collapse since 1929 is silly. The stock market gains are largely smoke and mirrors using money that the Federal Reserve has created out of thin air. It cannot continue and the longer it goes on, the worse the responding fall will be.
This regulation will be difficult to implement as Yves at Naked Capitalism details. But it would be a much needed baby step down the road of reform and true recovery. As long as the big banks can find comfort in explicit government backing while remaining unpunished for poor decisions and risky behavior, they will continue to act in exactly the same way they have been acting for 10 years. We cannot have true recovery until the Goldman Sachs of the world, parasites on true creation of wealth, have been reined in.