Obama's Financial Reform Plans: Small Steps in the Right Direction
And to stop Wall Street from killing again, he's trying to introduce a $90 billion TARP tax, he has pushed for the creation of a consumer financial protection agency, and last week, he announced his intention to ask Congress to pass the Volcker Rule, which will keep banks that take deposits from trading securities for themselves. As I wrote in a previous article, I don't think there is anything wrong with these ideas. For example, that TARP tax is a mere 6% of Wall Street's likely bonuses over the next decade. And it is a partial repayment of what the big banks owe taxpayers.
Unfortunately, there are three problems with what Obama has introduced so far. First, none of his actions appear to be creating enough jobs to make a serious dent in the unemployment rate. Although the administration claims its efforts have saved or created 2 million jobs, the public doesn't seem to be buying it.
Secondly, the financial reforms don't go far enough to prevent a repeat of the events that caused the financial crisis. To do that, Obama would need to implement regulations and have Congress pass laws that achieved eight goals:
- Put a stop to securitization.
- Limit the amount that banks can borrow to trade.
- Force all derivatives trading onto public exchanges, which will set and enforce reporting and capital requirements.
- End conflicts of interest such as those between ratings agencies and equity analysts and the sellers of the securities they analyze.
- Create an independent agency to produce financial statements for all public companies, including banks and investment managers.
- Require bankers to keep their pay in an escrow account that would be used to compensate investors for any losses that their deals create.
- Break up the biggest banks so none are ever too big to fail.
- Require banks to set aside enough capital to cover the cost of bailing themselves out in the future.
But while commercial and investment banking should be re-separated, there's a danger that the efforts to prevent a repeat of the last financial crisis may end up providing the basis for the next one. That's because whatever measures are put in place to enforce the new regulatory regime, they will primarily serve one purpose: to inspire the creativity of Wall Street's lawyers, who will create legal ways around that regime's intent.
To combat that risk, Washington's regulators will need to be even more creative and proactive to stay head of whatever Wall Street dreams up next.
Obama's financial reform efforts are headed in the right direction, but they don't go far enough. To solve his financial crisis-related political problems, Obama may need to do more than give a speech in which Paul Volcker is standing closer to Obama than Treasury Secretary Tim Geithner and former Treasury Secretary Summers.