Battle Lines on Banking

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Jackie Calmes and Louis Uchitelle report for the NYT that the Obama administration is getting ready for a renewed focus on cleaning up Wall Street:

The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading. […]

And this week, he served notice to senior lawmakers that he wants an independent agency to protect consumers as part of any financial overhaul legislation. […]

Now the concern is a new type of activity in which financial giants like Citigroup, Bank of America and JPMorgan Chase engage. They now operate on two fronts. On the one hand, they are commercial banks, taking deposits, making standard loans and managing the nation’s payment system. On the other hand, they trade securities for their own accounts, a hugely profitable endeavor. This proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout.

Basically the idea is that there’s nothing wrong with proprietary trading, but proprietary trading by commercial banks operating with implicit government guarantees amounts to gambling with the taxpayers’ money.

Simon Johnson, who’s generally been critical of the Obama administration’s approach, says:

The major question now is — will the White House have the courage of its convictions and really fight the big banks on this issue? If the White House goes into this fight half-hearted or without really understanding (or explaining) the underlying problem of unfettered banks that are too big to fail, they will not win.

I think this is the wrong way to think about it. You have to keep in mind that even a very courageous and tough White House can easily fail to get 60 votes in the Senate for a proposal. If you want Obama to be relatively uncompromising, then what you’re saying is that the administration should be prepared to not win in the current congress. To say, here’s where I stand, this is going to be an issue in 2010 and 2012, and I think we’re going to prevail over the long haul. It’s the demand for short-term legislative victory that generates unsavory compromises.