Peter Wallison believes President Obama’s populist plans for new banking regulations will lead to another bank crisis. No wonder the stock market’s been tanking.
After the Democrats’ disaster in Massachusetts last Tuesday, President Obama appears to be flailing. Gone is the cool and measured demeanor that made him look presidential when the financial crisis struck during the 2008 campaign. Instead, the financial reform proposals he advanced later in the week seem to reflect political panic—a desperate attempt to appeal to the populist sentiment against Wall Street. Unfortunately, they also reflect a limited understanding of good financial or banking policy.
First, Mr. Obama has proposed to limit the size of banks or their holding companies, or both. The trouble with limiting the size of these institutions is that no one has the faintest idea what the right size is. What’s more, if the purpose of the size limit is to prevent a bank or bank holding company from being or becoming too big to fail, we have to know what size would cause a failed institution to cause a financial train wreck. No one knows that, either. Under these circumstances, it’s hard to take such a proposal seriously.
Second, Mr. Obama says that some firms should be prohibited from engaging in “proprietary trading.” The White House announcement seems to apply to both banks and bank holding companies, but there is a huge difference between them. A bank is chartered by the government, its deposits are insured, it can participate in the U.S. payment system, and it has access to the Fed’s discount window. None of these things is true of a bank holding company—which is an ordinary corporation that controls a bank.
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Where, then, can banks find borrowers? The answer, unfortunately, is commercial and residential real estate.
Real-estate loans rose to 55% of all bank loans in 2008 from less than 25% in 1965. These loans will continue to rise in the future, because only real-estate, small business and consumer lending are now accessible activities for banks.
This is not a good trend, because the real-estate sector is highly cyclical and volatile. It was, indeed, the vast number of subprime and other risky mortgages in our financial system that caused the weakness of the banks and the financial crisis. Requiring banks to continue to lend to real estate, because they have few other alternatives, virtually guarantees another banking crisis in the future.
Since banks can never be let out of these restrictions as long as they are government-backed, one solution for banking organizations is to center their activities in the bank holding company which—because it is not government-backed—does not have to limit its range of activities. The fact that Mr. Obama now proposes to close off this one avenue through which banking organizations can be profitable is strong evidence that neither he nor his advisers, in attempting to lash out at banks, have thought through the long-term prospects and needs of the banking industry.
That might make good populist politics, but it is not responsible policy. Instead of trying to punish the banking industry, Mr. Obama should try to understand why banks have become so heavily invested in real estate.
Related: Ed Morrissey believes the Obama administration may have caused the failure of a bank in New Mexico. Read the whole thing, including the updates. Even if they didn’t directly cause the failure, you’ll see what Mr. Wallison is talking about when it comes to the next banking failure, which will be caused by over-investing in real estate.
Probably.
A little while back I came up with the kooky conspiracy theory that 0bama or somebody in the White House was coordinating their activities with another party. The theory I had was that 0bama, Axelrod or Emmauel knew somebody (with a few degrees of seperation to maintain plausable deniability) who would wait until the Administration declared its jihad on banks and financial institutions (Fannie Mae and Fredddie Mac being exempt, apparently) wait for the Dow-Jones to drop….what? 500 points in 2 days, then buy up shares of all the banks or other companies that have fallen out of favor with the administration- then sell them off when the administration backs off it’s rhetoric and the stock recovers. Once the hypothetical parties cash in their chips, they keep half and kick back half towards the the 0bama presidential library [those teleprompters and gold plated copies of The Audacity of Hope and Dreams of My Father won't be cheap!] or his 2012 re-election campaign.
Just a theory….I’m not sure how plausable such a scheme would be in the real world, tho’.
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Fenway, your theory isn’t as far off as you would think. Market manipulation has become a game with the government. The only problem the above cited article has is that Goldman Sachs became a bank holding company only to access money from the Fed. The “hold” NO banks and never intend to. In essence, they are a private company that has been bailed out by the tax payer.
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While I would like to believe that the entire Team Obama is just severely undereducated in the way things really work, I just can’t buy that. They do nothing without an ulterior motive and all motives seem to lead to a European-style nation versus a Constitutional Republic.
Despite Scott Brown, this is going to be a tough 3 years to get through. Someone else is running our country and the design is to cripple us into something like France; Obama’s just the beard.
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