The Presidents Plan to Reform Banks. So Far I Like It

On Thursday, the president unveiled a proposal to limit the functions of the big banks to less risky financial transactions.  This precipitated a drop in the Dow of over 200 points, and left some conservative pundits with steam venting out of their eyeballs.  I'm sure I'll find lots to hate about the president's plan as the details are fleshed out, but so far, I think this is a great idea.

As I understand the plan, it will create a financial system with several tiers of risk behavior.  At the bottom, with the least risk will be the plain vanilla banks.  They will be the only ones with FDIC deposit insurance.  They will be the only ones who can borrow money at favorable rates from the Federal Reserve.  In other words, the only ones whose activity will have the safety net of government protection.  If you want a safe place to invest your money, although with a lower rate of return, this will be the place for you.  These institutions won't be allowed to invest in riskier assets like credit default swaps or collateralized mortgage obligations.  They'll do traditional banking functions like taking in deposits and lending to qualified borrowers for things like starting and expanding businesses, buying  homes, and purchasing cars and appliances.

Anyone who wants to chase a higher return can do so through investment banks, mutual funds, or hedge funds, but they will have to accept the greater risk that greater rewards inevitably entail.  The only thing guaranteed about these institutions is that if they fail, the government will just let it happen.  No bailouts.

Surely the devil will be in the details.  Every level of risk will have its own level of regulation, and it's here that the fecklessness of the Democrats will likely show itself.  We can't let them tinker with regulatory rules to force bad practices on our financial institutions in the name of social engineering.  No more subsidizing bad loans from Fannie and Freddie to promote home ownership by financial deadbeats.  That's the kind of crap the Dems will try to pull off under the veil of "prudent regulation of our financial industry".

But lets not reject the president's initial proposal without a fair hearing.  If done correctly, this plan essentially reinstitutes Glass Steagal type protections as they existed before 1999.  This is the approach proposed by Paul Volcker, the former Federal Reserve Chairman who defeated runaway inflation during Ronald Reagan's presidency.  This is a reasonable man with sound credentials.  I was quite surprised to see the majority of conservative talking heads react negatively to the administration's plan.  Maybe we should talk this one over.  Just because the president and his administration are the mortal enemies of capitalism and the free market doesn't mean they can't have a good idea once in a while.  Even a broken watch is right twice a day.

Here's a positive perspective on the president's idea from Jim Manzi writing in the National Review blog "The Corner".  At least there is one conservative authority that sees some merit in this plan.

Jess