Pres. Obama Errs by Scapegoating the Banks

Pres. Barack Obama has once again set his sights on the financial services industry using banks and their suppliers as a punching bag to get in shape for the mid-term elections coming up in November.

As if the Card Accountability and Responsibility Disclosure (CARD) Act weren't enough, the president continues his attack on banks, continually blaming the industry for the financial mess we're in. The president, keenly interested in his "legacy," continues to harken back to the good old days. For Democrats these were the Great Depression. The president continually calls the current recession the worst economic times since the Depression, conveniently skipping over the 1970s--disco, Harvey Wallbangers, Quiana shirts, leisure suits, stagflation, double-digit interest rates and high unemployment. While anyone sane middle-age person might like to skip over the 1970s, the president believes we can cure our current ills by re-regulating the financial industry.

His answer is the second coming of the Glass-Steagall Act, that Depression era regulatory act that separated depository institutions from investment banking. But solumnist Jason Zweig of the Wall Street Journal says that might be a mistake. He points out that only 3% of the banks at the time had securities operations. In the 3 years following the act's implementation more than 2,000 banks folded-but only about 7% of those had securities businesses.

Mr. Zweib says rather than trying to be the new FDR, Pres. Obama should look at some positive moves that can really improve the banking system, rather than employing tactics that failed to work 80 years ago, and have little chance of working now.

Citing economist Edward Kane of Boston College, he offers the following suggestions to the president:

• Forget the populist riff about big Wall Street bonuses. If you're going to compensate execs, do it with a special class of stock and require the honchos to kick in their own dough if the bank looks like it's going belly up. Incentives are more effective than penalties.
• Make banks file "living wills" like you or I do, stating ahead of time what should happen to the assets of the bank if it fails.
• Rather than relying on grey-suited bureaucrats to save the financial system, create what Edward Kane calls a "West Point" for training regulators. If we're going to put the future of our economy in the hands of bureaucrats, why not make sure they know what they're going? 
• Last, why not provide incentives for regulators like we provide incentives for bankers? Bankers get incentives (e.i. bonuses) for producing revenue. Regulators should receive bonuses based on how many financial catastrophes they stop.

Mr. President, if you just want to demagogue and use bankers as scapegoats, that's fine. But you, of the supposedly towering intellect, should at least be intellectually honest. Admit that while your populist beat-up-bankers chant may help you troll for votes in November, it won't do anything to strengthen our financial system or restore our formerly best-in-class financial innovation.

But if you want to really solve what you see is a problem, then try the incentive approach. Something about catching more flies with sugar than vinegar.

Just thought you might like to know.