While Washington Democrats stare at each other and wonder what to do next in the health-care arena, the action shifts to economics.
From the Wall Street Journal:
WASHINGTON—President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return, at least in spirit, to some of the curbs on finance put in place during the Great Depression, according to congressional sources and administration officials.
The past decade saw widespread consolidation among large financial institutions to create huge banking titans. If Congress approves the proposal, the White House plan could permanently impose government constraints on the size and nature of banking.
Mr. Obama’s proposal is expected to include new scale restrictions on the size of the country’s largest financial institutions. The goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces. It couldn’t be learned what precise limits the White House will endorse, or whether Mr. Obama will spell out the exact limits on Thursday.
Mr. Obama is also expected to endorse, for the first time publicly, measures pushed by former Federal Reserve Chairman Paul Volcker, which would place restrictions on the proprietary trading done by commercial banks, essentially limiting the way banks bet with their own capital. Administration officials say they want to place “firewalls” between different divisions of financial companies to ensure banks don’t indirectly subsidize “speculative” trading through other subsidiaries that hold federally insured deposits.
As the Journal notes, the problem of “too big to fail” has gotten even worse as this crisis has played out, with the four biggest banks becoming considerably larger as they swallow competitors. White House aides say the proposals don’t amount to a restoration of the Glass-Steagall Act repealed in 1999, but are an attempt to reinstate “the spirit of Glass-Steagall.”
Again, you’ve got two policy choices. If some banks truly are too big to fail — a concept that the banks themselves admit is correct — you can let them fail anyway. But economists and banking experts from the left and right agree that’s a policy leading to disaster. As bad as this recession is, it pales in significance to what would have happened if we allowed the Wall Street dominos to topple one after the other. There’s really not much debate about that.
And if you’re NOT willing to let them fail — if government is going to intervene on their behalf in a crisis — then government has not just the right but the obligation to try to ensure that crisis never comes. To do anything less would be grossly irresponsible.