For Wall Street, Dr. Obama Prescribes a Placebo

In thirty minutes on Monday, in an address to a star studded audience near Wall Street, Barack Obama's proposals were worryingly hollow.  He proposed few specifics, instead articulating a broad and vague framework for reform with stale ideas that seem to be largely unchanged in the last six months.  

Understandably, his attention is more than divided.  But the lack of progress is painfully reminding of typical Washington malaise.

On health care he's quarterbacking, on financial regulation hes watching from a luxury box, content to outsource financial regulation reform to an inept and conflicted congress that is destructively influenced by the financial services lobby.  

His proposals while old, weren't without merit.  Proposed increases in capital requirements are good policy.  

The consumer financial protection agency, designed to protect individuals in lending fraud addresses real problems but faces tremendous opposition from the industry.  Yet, fraud, predatory lending, deceptive marketing and the like had little effect on the crisis.

The resolution authority is the administration's attempt at correcting too big to fail.  Unfortunately it doesn't.  Designed in the image of the FDIC, which has similar authority over the nation's dying banks, it is intended to create a systematic, orderly process by which theAIG's of the world are peacefully put to sleep, as opposed to the middle of the night panics that occurred in September of last year.

But details of how it would work, first floated in March, reveal a disturbing comfort with using large sums of taxpayer money in the dissolution process.     

The proposed creation of a super regulator sounds -- cynically perhaps -- like a plan to centralize incompetence.   Regulating hedge funds, a notion that received a vague mention, is a red herring.  They pose systemic risk only so long as real reforms go undone.

Part of the prescription is to avoid regulating or over-regulating the financial services sector, but to enforce the regulations that already exist.  Some introspection from Washington would also be healthy, for example, a reevaluation of policies like corporate and mortgage interest deductions, both of which distort markets and incentivize leverage.  Reasonable regulation on securities like credit default swaps (clearinghouses, margin requirements, etc.) are also in order.     

Financial regulation reform is infinitely more complicated than an issue like health care.  The populace is ignorant to the details and they disengage. In response, elected officials confuse easy, irrelevant reforms with difficult, meaningful ones.  They implement the former and pat themselves on the back.

The credit card bill, signed by Obama in May and designed to snuff out unscrupulous fees and poor disclosure practices in credit card lending, is almost entirely unrelated to the conditions that bred financial calamity.  Likewise, big Wall Street bonuses, despite being the target of populist furor, are merely a symptom of the underlying problems. 

Yet both have been touted as crucial progress in regulation reform.  This is disingenuous and the mere conflation of unrelated issues sounds like a failure to understand the underlying elements of what happened.

If the president really wanted to scare Wall Street to change its evil ways, he would have made one simple declarative statement: There will be no more bailouts," wrote CNBC's Charlie Gasparino. "The concept of too big to fail is over, and what's left of Wall Street will be obliterated if it once again engages in the behavior that boiled over this time last year."

This is true.  While the administration's rhetoric is anti too big to fail, the subtext of many proposals reveals continued belief in the underlying philosophy and Washington remains filled with bureaucrats, including the main architects of reform, who still believe in the policy.

Obama's priorities -- health care first, regulation second -- are understandable.  Conventional wisdom suggests any health care reform dies if not signed by year end.  But the populist backlash against Wall Street has waned and so has any requisite momentum. The administration's inability to walk and chew gum is a bit frustrating.  Incompetence was supposed to be a just a Bush administration problem.  Guess not.