Two days ago, I read Simon Schama's insightful piece on how US President Obama should adopt FDR-ish populist policies to regain momentum against resurgent Republican opposition. While I have been hard on Obama once in a while, make no mistake that I regard him as a lesser evil than those from the party of his predecessor. It now seems Schama was prescient: Obama has just unleashed new proposals to limit the remit of big banks in terms of trading on their own account and cornering "excessive" market share. What I would really like to know is what Larry Summers thinks of all this. While Summers' predecessor as Treasury Secretary Robert Rubin is often lumped as a "neoliberal" proponent of financial innovation and other shenanigans that contributed to the current mess, those who are better informed may beg to differ.For reasons too long to mention, I have read Rubin's autobiography In an Uncertain World: Tough Choices from Wall Street to Washington. There, he offers us this insight which the Washington Post relays in passing:
Rubin declined to comment for this article, but provided excerpts from his book, "In an Uncertain World," in which he writes that his deputy, Larry Summers, "thought I was overly concerned with the risks of derivatives. . . . Larry characterized my concern about derivatives as a preference for playing tennis with wooden racquets -- as opposed to the more powerful graphite and titanium ones used today."So I find it questionable that Buttonwood of the Economist intones Summers was somehow responsible for this new round of regulation as this streak is difficult to remove in diehards. OTOH, the Financial Times offers what I think is a more accurate appraisal of how this proposal came about: It's Paul Volcker, legendary former Fed chairperson gaining the trust of Obama at the expense of unnamed but easy-to-figure persons at the Treasury and White House:
Mr Volcker has intellectual clout and political capital in Congress, which will be needed as the administration tries to gather support for its new proposals. Ironically, it was the Treasury and the White House – where Mr Volcker heads an economic advisory board – that had given his ideas the cold shoulder.It doesn't require much imagination to fill in the blanks here: it was likely current Treasury Secretary Tim Geithner and Larry Summers of the White House's National Economic Council who gave Volcker the cold shoulder. After all, why would the Treasury secretary when the Financial Services Modernization Act of 1999 was passed (Summers) turf it with great enthusiasm a decade later? In other words, would Summers trade his titanium racquet for a wooden one all of a sudden? I can't offer you the answer with complete certainty but it's food for thought.
Otherwise, I am not averse to this effective reconstitution of Glass-Steagall with a little bit of mustard. Still, I must offer some qualifiers based on the proposal's description from the White House -
The proposal would:
1. Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.
Not being entirely unfamiliar with banking, my sense is that this will be difficult to operationalize. In banking terminology, large depositors are known as HNWI or "high net worth individuals." For obvious reasons, those making larger placements demand larger returns. Oftentimes, these HNWI are known as "private banking" clients as opposed to "retail banking" clients (or us small fry). While there have undoubtedly been underhanded ways of enhancing returns via tax evasion schemes and the like, banks are understandably in competition with each other to offer better returns to HNWI clients. Hedge funds and private equity funds are often risky ways for private banking clients to enhance returns on their funds. And therein lies the rub: if it's their money, shouldn't it be theirs to lose? This possibility contrasts with the second proviso about limiting "proprietary operations unrelated to serving customers for profit." More clarity here, please, since hedge funds and private equity have often been set up at the behest of clients seeking better returns or "serving customers for profit."
2. Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.
That's really great and everything, but many banks operating in the United States do not operate in America alone. What's to limit US banks from "excessive growth" abroad? Also, what's to stop HNWI from fleeing American banks in search of better returns offered by foreign financial services providers? That would seem to hurt them more than help them.
To be fair, we haven't seen the full details of the proposed legislation yet. In any event, efforts of this sort may be bound to backfire if they aren't applied evenly in the rest of the world as I've suggested before in relation to the British bashing of banker bonuses. In the meantime, I'd be very interested to hear Larry "Wooden Racquets" Summers comment on the matter along with his erstwhile protege Tim "Deficits Still Don't Matter" Geithner. Are we seeing Obama turn away from the Summers-Geithner axis? It's certainly a welcome thought. (Rest assured that I do not look forward to the Palin administration.) In the meantime, go Paul Volcker! For that matter, go wooden tennis racquets! Just love that Bjorn Borg.
UPDATE 1: The Tories--assumed successors to Labour--seem keen on trading curbs as well. With both Anglo-Saxon economies more uniformly applying these sorts of rules, the scope for regulatory arbitrage is limited.
UPDATE 2: Pictures of a beaming Paul Volcker and a downcast Larry Summers say a thousand words.
