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President Obama and the War on Banks

Posted By James Gattuso On January 22, 2010 @ 5:42 pm In Economics | Comments Disabled

Forget the war on terrorism, the war on drugs, even the war on poverty. President Obama seems to have declared a new war, a war on banks. It was launched last week with the proposal of a “bank tax [1],” supposedly meant to get TARP bailout money back to taxpayers (although it would leave out firms such as General Motors that actually owe most of the money). It continued yesterday with the President’s proposal [2] of new bank regulations — limiting what banks can invest in as well as limiting to total size of financial institutions.

There’s not much to recommend either proposal. Neither would do much to avoid another financial catastrophe. In fact, by limiting the scope and size of an institution’s investments, there’s a good chance that they would make the system less, not more, stable.

And it isn’t just the president’s opponents who are skeptical. Reportedly, Treasury Secretary Tim Geithner, along with White House economic advisor Larry Summers, fought hard internally against [3] the proposals, arguing that they would unnecessarily damage the international competitiveness of the financial sector. But, they, apparently, were overruled.

The reason isn’t hard to see. Despite (or perhaps because of) the potential damage to financial firms, the politics of a war on Wall Street must have been irresistable. Who likes bankers anyway? What better way to pump up sagging poll numbers than to pick a fight with them? The President all but said as much, stating: “So if these folks want a fight, it’s a fight I’m ready to have.”

The dangers of the regulations, and — perhaps more — the virulence of the populist rhetoric, sent the markets into a tailspin yesterday, with the Dow losing 213 points yesterday and another 216 today. It’s unclear exactly what effect the drop will have on White House strategists, however. The goal, after all, was a war on Wall Street, so couldn’t have been surprised that Wall Street recoiled. And on the Left the new hard line against the capitalists was greeted with applause [4]. France also congratulated [5] Mr. Obama, saying they were glad to see him following their lead, although it wasn’t clear how welcome that embrace was).

But will the average American side with the President? Certainly, there’s lingering resentment against banks in the wake of the TARP fiasco. And reports of big bonuses this year certainly won’t win banks any popularity constests.

But there’s reason to believe Americans won’t be led so easily. Bankers as a whole certainly aren’t loved, but polls show politicians [6] coming in even lower. And outrage over bonuses and other abuses is concentrated [7] on those using taxpayer money.

Second, the ultimate judgment on Obama’s policy will be the results. And, however populist, a policy that hurts the economy, and reduces jobs, won’t win brownie points.

Lastly, despite the President’s assertion that his plan would assure that “[n[ever again will the American taxpayer be held hostage by a bank that is too big to fail,” American’s will likely take that — as they should — with more than a few tablespoons of salt. Not only are the new reforms unlikely to ward off future bailouts, but the other financial reforms now pending in Congress would actually make them more likely. And the Administration’s insistence that the TARP program itself continue won’t help the message.

The Administration’s bank war is a fairly transparent attempt to score political points at the expense of good policy. The good news is that Americans should see through it.


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URL to article: http://blog.heritage.org/2010/01/22/president-obama-and-the-war-on-banks/

URLs in this post:

[1] bank tax: http://www.foundry.org/2010/01/15/morning-bell-bank-tax-misses-the-real-bailout-deadbeats-in-detroit-and-dc/

[2] proposal: http://www.reuters.com/article/idUSTRE60K5D820100122

[3] against: http://dealbook.blogs.nytimes.com/2010/01/22/in-bank-plan-geithners-views-lose-ground/

[4] applause: http://www.huffingtonpost.com/neil-k-shenai/obamas-plan-finally-attac_b_432462.html

[5] congratulated: http://www.foundry.org/2010/01/22/reuters-france-welcomes-obamas-bank-regulation-proposals/

[6] politicians: http://www.gallup.com/poll/1654/Honesty-Ethics-Professions.aspx

[7] concentrated: http://www.rasmussenreports.com/public_content/business/general_business/march_2009/most_americans_support_government_control_of_executive_pay_only_if_taxpayer_money_is_involved

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