Obama's Push for Bank Reform

“President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities.” This from the New York Times (http://www.nytimes.com/2010/01/21/business/21volcker.html?hp) and from the Wall Street Journal (http://online.wsj.com/article/SB10001424052748704320104575015910344117800.html?mod=WSJ_hps_LEFTWhatsNews).

After the Tuesday victory of Scott Brown in the Massachusetts Senate race, the Obama administration seems to be going “populist” and taking on Wall Street and the bankers seems to be the way to go!

Simon Johnson, a professor at MIT, published this advice on the New Republic website this morning: “Run hard now, against the big banks. If they oppose the administration, this will make their power more blatant--and just strengthen the case for breaking them up. And if the biggest banks stay quiet, so much the better--go for even more sensible reform to constrain reckless risk-taking in the financial sector.” (See http://www.tnr.com/blog/simon-johnson/trap-their-own-design.)

This, I believe, is the wrong direction for the Obama administration to take. First of all, I believe it is incorrect. See for example my post from yesterday, “Blame the Central Bankers” (http://seekingalpha.com/article/183429-blame-the-central-bankers). Also see my post from Wednesday “Bracing for New Banking Regulations” (http://seekingalpha.com/article/183203-bracing-for-new-banking-regulations).

Secondly, there is strong evidence that you cannot win on a “populist” platform. Arguing from the “populist” approach can vote someone out of office, but it doesn’t seem to be able to elect anyone to office.

I still believe that Al Gore had the 2000 election wrapped up until he took on the “populist” mantel during the election campaign. I can still see him overlooking the Mississippi River in Mark Twain’s childhood home town of Hannibal, Missouri. Then I heard him starting to expound on the world as a “populist” politician would. My comment to others at that time: if Gore keeps heading in this direction he has lost the election!

The same advice also comes from one of the most astute political families in America: the Clinton family. In Robert Rubin’s book “In an Uncertain World: Tough Choices from Wall Street to Washington,” Rubin presents a discussion he had with Hillary Clinton. He wanted to take a public approach to an issue that was couched in “populist” language. Rubin states that Hillary responded strongly to his ideas with the comment that one could not win elections relying on a “populist” message. Rubin, consequently, backed off this approach to presenting the matter.
And, he succeeded in getting what he was after, politically.

I believe that the approach the President is taking toward banking reform should be strongly rejected. Not only do I believe that it will not help him to get re-elected, I believe that it would be a disaster for the American financial system!