As important as the Supreme Court decision was it is almost overshadowed by the President Obama’s proposals to get banks out of the private equity business, the main idea being to bar the banks from playing in riskier markets. The main obvious difficulty with this proposal is that unless other national environments go synchronize their move then US banks may be at a competitive disadvantage. So noises are being made about settling it within the framework of an international deal.
Obama’s initiative will garner a the support of those who believe that some return to Glass-Steagal, abolished by Clinton in 1999, is desirable. It will also play to the popular resentment of the financial industry. To some extent, this will be government trying to destroy its own monster, at least one it helped in part create.
The two problems facing the monster slayers are that it may in the short term affect the amount of credit and capital available. More importantly, it may have no effect. Given the mobility of money pathways are likely to evolve in which deposit money is effectively staked on high risk ventures. Government itself did this by encouraging the bundling of subprime mortgages and when that bombed the effects rang through the whole system.
In short, the President wants to firewall off different parts of the financial system by rebuilding some of the walls which had been torn down in the past. In order to successfully achieve this, he has to do it right. Doing it wrong will be fraught with danger. It is a gigantic task, requiring international cooperation, timing and attention to detail. And unless done correctly it may result in an expensive disaster.
Can Obama do it? Can the political system do it? My guess is that he’ll have a hard time for two reasons. First, it is a bait and switch again. He is rounding on Wall Street, which is not a bad thing in itself, but to do that he will need to enlist the help of political forces he’s already betrayed. One of the subtexts is that Wall Street may have thought they had an understanding, and now maybe they don’t. Rightly or wrongly, that the double-cross factor. Second, he will have to craft the financial regulatory overhaul carefully. It can blow up in his face. But given the cast of characters he has at Treasury it is certain some of them will be conflicted, some probably thinking past the time when the Obama administration will be over and their professional lives not yet. Obama needs a political parachute to save his plumetting Presidency, and this initiative has many positives going for it; but his capacity to execute is may be severely impaired.
My prediction? Anything can happen. It may be a big victory for Obama, an impending disaster or anything in between. But it will severely challenge the Republican response. I think more details will emerge in the days ahead and when the nuts and bolts shine through the rust, it will be clearer whether the administration’s proposal reduces risk without unduly throttling credit. Most important, we’ll see whether the risk reduction is roughly symmetrical over all actors, or whether some will be more restricted than others.
