Obama’s bank plan doesn’t go far enough

Dynastic succession isn’t always a voyage on a smooth, sunlit sea. Like all families, dynasties have their issues, too. Maybe that is why “Dynasty,” the 1980s evening television soap opera, was so popular.

It isn’t only their own forces that keep families interesting. There are outside influences, too. From the Ford Motor Co. to the Federal Reserve, both hereditary and anointed successors often end up battered, and sometimes even beached, by waves of change.

Political parties are, at best, dysfunctional families, of course, and it is not really accurate to call any elective office a dynastic succession, no matter how long it has been held by one party. The recent Massachusetts election, though, marked at the very least the end of an era.

Dynasty or not, the surprising election results released a flood of Monday morning punditry about what the vote really means, and what message the voters were really sending. Unfortunately, while this glut of mostly useless over-interpretation might affect election campaign strategies, it is not likely to help us much when it comes to finding the best way out of our economic problems.

Neither political analysis nor politics itself has been very helpful so far, for example, in lighting a fire under financial reform. Essentially we have done nothing to change the financial market structure to reduce the odds of another Wall Street bust.

Just recently, though, President Barack Obama announced his plan to change the structure of our banking system and that is a hopeful sign. Some have tied the sudden announcement of a White House financial reform plan to the Massachusetts election results, but we don’t have to care about that if we don’t want to. It is simply good that we are finally addressing this important issue.

There are two basic elements to his plan: The first involves securities and other trading operations by banks and the second relates to bank size.

The trading portion of the plan tries to be straightforward. Unfortunately, it does not succeed in doing so and Wall Street is already bragging about how it can circumvent the plan’s imprecise rules and prohibitions.

What the president’s plan does not do, regrettably, is restore the Glass-Steagall Act, which had been enacted in 1933 in response to the banks’ role in causing the 1929 stock market crash and subsequent Great Depression. Until 1999, when it was repealed, the law had effectively kept banks out of the riskier financial market areas.

Since then, of course, financial markets have developed new games of chance for individuals and institutions and it is on these new pursuits that the president’s plan focuses. A White House statement said that “The president and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.”

To make this regulation work, we will have to do some real pick-and-shovel work to define the financial regulation plan’s scope and terms of endearment. A hedge fund, for example, is pretty much defined as such by its owners and managers rather than by regulators, who have largely confined their interest to making sure that only wealthy investors participate. We have no adequate statutory definition of what exactly a hedge fund is. In fact, when it comes down to it, our definition of what a bank is could use a little work, too.

Much the same fog surrounds the issue of trading operations. Banks, for example, have routinely traded Fed funds — that is, their excess reserve balances — and did so quite legally when the Glass-Steagall Act was in full force. These operations, which could entail both risk and profit, served customers only at a distance, to the extent that the whole bank, as an entity comprised of all its operations, served its customers. Yet, they are a good thing — for banks, for customers, and for our economy. Separating bad trading from good trading will require both knowledge and judgment that goes beyond political analysis.

The size portion of the president’s plan is much simpler, and better for it. It would end further consolidation in the banking industry by limiting the growth of market share by any bank. In other words, they will, after all these decades, begin enforcing the existing, if often mystically obtuse, anti-trust laws.

While it is hopeful that we are finally lighting a fire underneath the idea of financial reform, we do have to remember what Congress was able to do with the idea of health insurance reform. When Congress cooks, it’s easy to lose your appetite.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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