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Saturday, January 23, 2010

Dismantling the banking system: is Obama lashing out at America for rejecting him?

He already wanted to tax the banks for having the temerity to turn a profit with the bailout money (wasn't that the point, to get the banks into the black again?), so the new plan to break up the banks is not different in kind. What IS different is the atmospherics.

The move, immediately after Obama's election defeat in Massachusetts, seems to have been very sudden, catching even his closest allies by surprise. With no warning, the previously "indispensable" Timmy-boy Geithner was cast aside in favor of the Depression-era nostrums of Paul Volker. Obama didn't even take the time to get the Congressmen who stood with him at the announcement on board:
Mr Obama’s more populist tack on Wall Street re-regulation failed to attract endorsement from Chris Dodd, chairman of the Senate banking committee, even though he was present when Mr Obama made the announcement.
The announcement was also described by insiders as "political":
“The Obama proposals were clearly politically motivated and came from the White House not the Treasury,” says a Democratic adviser to the administration, who withheld his name.
Just what does "politically motivated" mean, at a point in time when the nation was looking for Obama's initial reaction to the Massachusetts referendum on Obamacare? And it was a referendum. Obama made sure of it, announcing about the Massachusetts election:
If Republicans want to campaign against what we've done by standing up for the status quo and for insurance companies over American families and businesses, that is a fight I want to have.
"Insurance companies" here is a reference to socialized medicine, which Obama pitches as a way to stop the greedy insurance companies from cheating sick and injured Americans. Voters saw the election that way too, according to Rasmussen:
56% of Massachusetts voters named health care as the most important issue.
Compare with Obama press secretary "Baghdad Bob" Gibbs, who told Chris Wallace this morning:
They did a poll of voters who participated in why they voted. Right. More people voted express their support for Barack Obama than to oppose him.
Now THAT is an example of sheer contempt for the American people: "No matter how loudly you shout at us, we will NOT hear you." Gibbs repeated this theme over and over, making absurd claims about what the American people are actually angry about: that health "reform" (communization) has not been accomplished yet, etcetera. Given this undeniable contempt, actually lashing back at the American people fits perfectly.

The merits of the Geithner approach vs. the Volker approach is a separate issue. I think they are both disastrous, and am certain that Obama has not a clue about the merits of either. What he did know is that the Volker switch would deal a hard blow to Wall Street, in the same vein as the bank tax that Obama announced before the election.

Banking is "the major industry here" said New York Mayor Bloomberg, and Obama's proposed tax would "drive business overseas":
you want to see what happens to a city when their major industry fails, just take a look at Detroit.
Obama's second slap at New York, his plan to chop up the banking system, had Mayor Bloomberg at a loss for how to answer such an attack:
Maybe we should hold back their salaries for a decade or so and see whether the laws they pass work out.
If this was a planned progression by Obama, the renunciation he received from Massachusetts certainly did not give him any pause, and the timing, a seemingly hurried announcement, right when his initial response to Massachusetts was being looked for, sure makes it look like a belligerent response.

On the merits

Volker's plan is to re-impose Depression era regulations, abandoned in the 1990's, that bar banks that benefit from federal deposit insurance from taking proprietary positions (that is, from acting as investment banks or hedge funds, where they are taking an equity position on investments):
Under the Obama proposal, banks that take federally insured deposits or have the right to borrow from the Fed would be prohibited from owning, investing in or sponsoring hedge funds or private-equity firms. "You can choose to engage in proprietary trading, or you can own a bank, but you can't do both," an administration official said.
Under the old rules, deposit-taking banks and investment banks actually had to be separate entities. Under the proposed rules (I'm not sure about this) the break-up will not have to be total, but the different operations will have to be financially separate. Break-up in effect if not in name.

As Obama puts it:
We cannot accept a system in which shareholders make money on these operations if the bank wins, but taxpayers foot the bill if the bank loses.
The Washington Post helpfully summarizes:
At its heart, Volcker's plan restricts banks from making speculative investments that do not benefit their customers.
Gibbs repeated this to Chris Wallace (also this morning), stating that the government would not allow banks to take federal money and "make profits not for their clients but for themselves."

The premise here is that proprietary positions, when they pay off, benefit shareholders, but don't benefit depositors, so if the deposits are government backed, banks shouldn't be allowed to take these positions. This premise is total and complete garbage.

When banks use deposits to make money--HOWEVER they use it to make money--the rate at which they make money determines the interests rates they can pay to depositors (and will pay to depositors if markets are competitive). The idea that some profitable activities only help shareholders is a fraudulent claim that would get Mr. Volker an F in any introductory economics class.
"The key issue is that institutions that are getting a backstop from the taxpayer shouldn't be able to make a profit off their own investing," said Austan Goolsbee, a White House economist who staffs the presidential advisory board Mr. Volcker chairs.
Okay Mr. flunked-econ-1, so what did banks do BEFORE there was federal deposit insurance? Correct: they made profits off of their own investing (inducing them to pay interest to depositors in order to raise the capital to make these investments).

Sound regulation lets markets work

Deposit insurance is a government interference with the natural free market order. Any such interference should be gauged to screw up the natural order as little as possible, accomplishing their regulatory purpose with the least distortion of incentives. (In the ideal case, impositions will actually help create correct incentives, when markets fail to account all costs, but that isn't always possible.)

At present, our deposit insurance system is way out of whack. It should be limited to the most basic depositor protection, guaranteeing only a modest maximum amount for everybody, as disaster mitigation. It was never supposed to guarantee large deposits. When it was moved in this direction in the 1980's the result was the Savings and Loan debacle. Instead of insuring a single $40,000 account for each individual, FDIC started insuring any number of $100,000 accounts. KABOOM!

The correct answer is not to dismantle our banking system to try to accommodate the perverse incentives of an insane deposit insurance system. It is to pare back deposit insurance to something sane.

But deposit insurance isn't even the source of our present problems. Instead of learning from the S&L crisis that massive federal guarantees for private investment is the equivalent of mixing ammonium nitrate and diesel oil, Congress immediately started doing the same thing on a hundred times the scale, guaranteeing sub-prime mortgages as a way of pursuing affirmative action for home ownership.

This is what is so bizarre and perverse about Obama's current banking proposal. Deposit insurance is not the cause of our current financial debacle. Fannie Mae and Freddie Mac are, and the federal loan guarantees that created this debacle are still proceeding apace. So Obama-Volker are using retrograde tactics to go after the lesser problem, while still continuing to pull the control rods from a nuclear reactor in meltdown.

Insiders are verifying that this is "political," by which they mean that Obama is taking an overtly populist stance, blaming Wall Street bankers for the nation's problems and taking it out of their hides on the supposed behalf of the people. Says BusinessWeek:
Virtually every figure in Washington right now is trying to step forward and make clear they’re with the people and not the bankers.
Completely insincere in Obama's case, since he is still promoting loan guarantees that taxpayers will have to foot the bill for, but that is nothing new. Obama is obviously not above such populism. I just wonder if he isn't actually beneath it, taking an opportunity to lash out at America for slapping his face in Massachusetts.

He's can't even pretend to be the left's jock any more

The jocular "Downtown Scotty Brown," a genuine A-list jock, already called him on it. If you have seen Obama's golf swing, you know he is not a natural athlete, even though, being part black, the leftists all assume he must be. The left hates jocks. Whether they are were all Dweebs in high school, or Crunchy Granolas, or Potheads, I'm not sure, but Jock-hatred has long been a staple of mainstream-left culture.

As a result, the Obamatons can't help but be ga-ga over the idea that Obama can actually play basketball a little bit. Finally, they have an athlete of their own, and since they don't know how to tell a little bit of basketball from a lot, they assume he must be awesome. Obama knows this is a joke, but it is a private joke: he knows that others don't know.

Now he got called on it by a man who was the MVP of the Middlesex basketball league, a league that is replete with big high schools (including the 2500 student Lexington High School that I attended). It has good teams, beautiful cheerleaders, and packed gyms. Guys from my time at Lexington High went on to play in the NBA (Ron Lee) and in Europe ("Sig," full name eluding me). To be MVP in that league, you gotta be a stud.

Brown is also funny. Did Massachusetts elect a Senator, or a comedian?

I think the "available" joke is hilarious, but the Obama-truck-basketball riff is pure comic genius, a genuinely friendly challenge for Obama, with an only half-hidden bite: if you're going to play me and my daughter 2-on-2, you better not mind losing.

About that "available" joke

Some people thought the joke about his daughters being available was a gaffe, or worse. I think they must not know what the word "available" means. It is the opposite of "taken," or "married," and is shorthand for "single," and "unaffianced." In other words, it is a thoroughly conservative notion, as is the idea that it is for parents to speak for their daughters' availability.

It is only since the 60's that approaching young women directly about their availability became the norm. If Mr. Brown thought it was a good idea to make this information public, he has pretty much every parent in human history on his side. Until the age of Ms, this information was contained in every woman's name!

For a father in the spotlight to find such an amusing way to introduce his daughters to the world shows an amazing comic confidence. It's brilliant. The only question of propriety is the risk he took with his daughters' introduction. What if he failed to pull it off gracefully? But he knew he could do it and he did it. Notice that daughter Ayla was beaming and laughing throughout the whole episode.

How Glen Beck can watch such an awesome display of comic talent and not see it is bizarre, especially as he is a performer himself.

Geithner on the merits
Geithner agreed with Volcker that banks' risk-taking needed to be constrained. But through much of the past year, Geithner said the best approach to limiting it is to require banks to hold more capital in reserve to cover losses, reducing their potential profits. Geithner said blanket prohibitions on specific activities would be less effective, in part because such bans would eliminate some legitimate activity unnecessarily.
As far as he goes, Geithner is making sense, but he fails to mention the first need, which is to stop the ticking-time-bomb loan guarantees (which do not just enable unprofitable behavior, but induce it).

Geithner does refer (obliquely, with his call for banks to hold greater reserves) to the next necessary step, which is to place a single regulatory limit on leverage that applies to all financial institutions and transactions. Leverage must be limited by margin requirements in the range of 10-20%, otherwise any significant shock can set off a deflationary spiral. This has been learned by long and bitter experience. Excessive leverage allows bubbles to form and pop.

Reasonable leverage limits were violated by the complicated new instruments that were used to securitize sub-prime mortgages. Regulators, not fully understanding how the instruments worked, tried to estimate the riskiness of the instruments analytically, and set capital requirements on that basis. Focused on this approach, they FAILED to keep an eye on leverage ratios and let margins get down to 1 and 2 percent. They got mesmerized by the complex, forgot the most basic regulatory principles, and KABOOM!

These reforms don't require any structural changes to the banking industry. There is no reason for any bans that, as Geithner says of the Volker approach, "would eliminate some legitimate activity unnecessarily." The problem is that these reforms are not by themselves sufficient to get us out of our present state of near financial collapse. The system needs unusual help, which requires at least some discretionary policy about who to help. This is a difficult situation to manage, with to-save-or-not-to-save decisions popping up with horrible regularity.

A job with huge unavoidable discretion is not the right place for someone with Geithner's proven lack of integrity. This is a fabulously well-off guy (by ordinary standards) who didn't pay his taxes, and there are indications that his professional ethics have followed form. Not the right person to have delivering vast discretionary moneybags to the Wall Street interests of his choice. If there really is reason for taxpayers to be angry about Wall Street insiders being treated with undue favoritism at the public expense, it comes straight through the Obama cabinet.

To dismantle the banking industry because of corrupt White House discretion is endlessly perverse. Just the ticket for a left-wing psuedo-jock who has just been slapped by the very Democrat fans who previously raised him up, and whose champion has just threatened to undress his supposed athletic prowess.

I wonder if Obama has thought of his proposal a hundred times before announcing it. It seems that his plan makes things worse rather than solve the problem. He is going for a substitute and not for the solution. When will he realize this?
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