Welcome, Barack

So Barack Obama has come around to the idea that big banks need to be made smaller and that smarter regulation (contingent capital, enhanced capital requirements for large banks, resolution authority, etc.) just won’t cut it. Today he proposed limits on market share (measured by a bank’s share of total bank liabilities in the United States) and a prohibition on internal hedge funds, private equity funds, and proprietary trading.

This is great. It means that the administration is moving in the right direction–breaking up big banks–and the president is putting his name behind it. For more on why these are good ideas, see Mike Konczal.

OK, now for the caveats.

Any such legislation has little chance of passing in this session. The (now 41) Republicans had already signaled their intention to kill the Consumer Financial Protection Agency in the Senate, and I was already wondering how the CFPA could survive; banning proprietary trading will be that much harder to pass. (I could be wrong, since theoretically Republicans should want to eliminate implicit government subsidies and increase competition; it depends on how they balance that with their determination to prevent Obama from accomplishing anything.) And if I’m right about this session, I’m ever more right about next session, since the Democrats are likely to lose seats in November for all sorts of structural reasons (first midterm election, more seats up for grabs, high unemployment, etc.). That said, this is a battle for the next decade. And having Obama on our side increases our chances of winning.

But is he actually on our side? The administration is trying to spin this as something it has been considering since last summer, believe it or not, not an abrupt shift in policy. Although Obama wants to call the prohibition of proprietary trading the “Volcker Rule,” in late October Volcker ways saying quite clearly that the administration opposed him on this issue. This is an abrupt shift. And while I still welcome the shift, that makes me wonder how much of it is politically motivated. Simon argued earlier this week that the Democrats should run against Wall Street this November, and this could be what Obama is doing. Again, all good–the more visible the TBTF issue is, the more likely it is that we will solve this problem some day. But are Summers and Geithner on board, or is this a political decision coming from Axelrod that will be discarded later?

Finally, there’s the matter if the concentration limits will be strict enough and if they will be enforced. We already have a rule saying that no bank can have more than 10 percent of all deposits in the country, and that rule has been waived for three banks already. Simon and I favor strict limits and no regulatory wiggle room.

For today, though, I’ll take it what I can get.

About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

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