Today President Barack Obama fired a shot at commercial and investment banks by announcing a two-pronged proposal designed to rein in the excesses of the financial community.
First, Mr. Obama is proposing that no bank or financial institution that contains a bank will own, invest in, or sponsor a hedge fund or private equity fund, or proprietary trading operations unrelated to the interests of bank customers.
Second, the president wants limits on the consolidation of the financial industry. He does not want to see a few banks that could be considered as too big to fail.
Mr. Obama was his most forceful today in laying what appears to be full blame for the economic slow down on the meltdown in the financial markets. Unfortunately he has the events backwards. The economic decline came before the meltdown in the financial markets.
In his rush to create his own Bush-like search for weapons of mass destruction, the president has turned what used to be Wall Street into the equivalent of Saddam Hussein. Unless the banks are stopped from employing the same old methods of financial annihilation, the problems will continue, according to the president.
As we now know, Saddam used up all his weapons and had nothing to do with 9/11. We can say the same thing about so-called Wall Street firms. Yes, they may have engineered exotic derivative instruments; instruments that were in use about a decade and a half before the 2008 meltdown. Yes, they may have securitized pools of loans, but securitization is a practice that, albeit in a smaller form, has been around since Fannie and Freddie were created. And regarding hedge funds and private equity funds, they, by their very nature were the victims of the collapse of the securities markets as much as any other investor given that they too invested in these mortgage-backed products.
What we are really seeing here from Mr. Obama is the age old game of political cover. The beatdown this past Tuesday in Massachusetts stemming from Senator-elect Scott Brown’s capture of the late Senator Ted Kennedy’s seat calls for the Democrats to look potent and tough on another issue while hopefully regaining some spent political capital. It is, however, a lame and pathetic attempt given that beating up on banks is not an optimal solution to the crisis of a shortfall in output and aggregate demand and the lack of employment for ten percent of the workforce.
No matter how you put it, economic downturns are about our ability to employ our resources and produce. Beating up on banks in the search of an excuse that will resonate with the populists amongst us is not how you turn around an economy.