The Reasoned Review

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Diet Glass-Stegall

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The Economist has a pretty good rundown of Mr. Obama’s proposed financial “regulations”. You can tell they really want to be in favor of this, but even The Economist realizes that short of breaking up the big banks once and for all, any “regulation” is bound to fall short.

This is one of my favorite lines in the article:

Though not a full return to Glass-Steagall, the law that separated commercial banking and investment banking in the wake of the Great Depression (and was repealed in 1999), [the plan] is at least a return to its “spirit”, as one official put it.

Ha! Its spirit! Well, that oughta teach those bad ol’ banks a lesson.

But at least The Economist is honest enough to call a spade a spade:

Moreover, the plan is unlikely to help much in solving the too-big-to-fail problem. Even shorn of prop-trading, the biggest firms will still be huge (though also less prone to the conflicts of interest that come with the ability to trade against clients). As for the new limits on non-deposit funding, officials admit that these are designed to prevent further growth rather than to force firms to shrink.

They may, in any case, be pointed at the wrong target. Curbing the use of deposits in “casino” banking is an understandable impulse, but some of the worst blow-ups of the crisis involved firms that were not deposit-takers, such as American International Group and Lehman Brothers. And much of the losses stemmed not from trading but from straightforward bad lending (think of Washington Mutual, Wachovia and HBOS).

So how is Wall Street reacting? The Journal and The Times each emphasize the stock-market response (with colorful verbs such as “plunges” and “sinks”), but Kevin Drum over at Mother Jones got an e-mail which I think illustrates Wall Street’s mood a bit better:

Nobody I’ve talked to on Wall Street seems to think the proposed reforms (although details remain vague) are anything more than PR, aimed in the wrong direction, don’t do anything to make risk-taking more expensive, and are mere structural reforms that will be annoying to get around, but will be gotten around.

We’ll see what comes out in the next few days. Maybe there’s more to it than telling a bank you can’t invest in PE funds. We can hope anyway.

But if the intent was to “go after the banks” and get the HuffPo crowd revved up, it seems to be working. Hey, maybe we can throw in Geithner or Bernanke’s scalp and “hope” will re-spring eternal.

Yeah, that seems closer to the mark.

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Written by pavanvan

January 23, 2010 at 11:13 am

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