Don’t Take It To The Bank: Obama’s Wrong-Headed Attack On Risk
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Ours is a society increasingly obsessed with mitigating risk. Fears over the (imaginary) nefarious effects of salt haunt the dreams of the mayor of America’s largest city. Dangers thought (mistakenly) to be inherent in second-hand cigarette smoke lead to draconian and illiberal anti-smoking measures. And the infinitesimally miniscule risk of being killed in an act of airline terrorism leads to onerous restrictions on inflight mobility.
The war on risk took a particularly dangerous and troubling turn last week. The President announced a new financial policy that will attack “risk” – and with it, the American economy and job market. Here is how the New York Times described President Obama’s proposal:
His [Obama's] chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. Big losses in the trading of those securities precipitated the credit crisis in 2008 and the federal bailout.
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It will be the third time in just a week that he has waded into the battle heating up in Congress over tightening regulation of financial institutions to avoid the sort of abuses that contributed to the near collapse on Wall Street. Last week he proposed a new tax on some 50 of the largest banks to raise enough money to recover the losses from the financial bailout, which ultimately could cost up to $117 billion, the Treasury estimates.
Lamentably, the President has decided to penalize banks that engage in “risky” behavior. He publicly addressed the matter later, describing his objective as “limiting bank risk-taking.” The Times described this move as “populist” – perhaps the NYT stylebook rules out use of the word “desperate.” Let’s try another one: stupid.
Joblessness continues to rise, and economic growth is solely nominal. All of which goes to show: more than anything right now, America needs to encourage risk. The main engine for propelling new investment and subsequent hiring is business risk taking. And how are those risks financed? Through the same banks that the President has decided to punish.
Obama’s proposed regulations will attack banks twofold: first, the federal government will levy a straight fine on banks for the grave crime of engaging in banking. The money that the federal government will extract from banks guilty of being banks is money that could have been spent financing private investment and job creation. Second, the federal government will act to limit the trading of securities that have traditionally been one of the most profitable activities that big banks engage in. Again, the subsequent loss in liquidity will be the Americans worker’s loss, as banks have will less money to lend to risk-taking entrepreneurs.
It’s tempting to conclude that, with the economy now destroying Obama, Obama has decided to destroy the economy. But I suspect it’s nothing so churlish. The President seems to have bought into the bizarre false dichotomy between “people” and “companies.” At present – broadly speaking – what’s good for corporations is good for the American people. Corporations create jobs – and we need jobs. Fast. Furthermore, the new policy seems also a manifestation of Obama’s much-discussed incrementalism and aversion to risk-taking. The anti-risk, low horizon mentality that plagues so much many contemporary thinkers has infected our President as well.
A funny thing though: with the economy in such dire straits, attacking risk is the riskiest act of all.
via Obama to Propose Limits on Big Banks – NYTimes.com.
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The problem is that with the “most profitable activities” available the banks did not bother to lend money to businesses, so please don’t make it sound like a big loss for file and rank. It’s some separate country, which have been stolen from people first financially, now politically. Neither banks nor Govt really need people to do what they want, so even if they suddenly quarrel don’t say they quarrel over the public benefit.
“All of which goes to show: more than anything right now, America needs to encourage risk.”
Why don’t we thus change the tax code to make losses on gambling and playing Lotto deductible? That’s risk, isn’t it? What sort of nonsensical commentary is this? Why not re-inflate the housing bubble and bet on housing prices go up? Isn’t that risk-should we start that again?
What needs to be encouraged is a sensible approach to risk-businesses that want to expand with sound business plans are risks worth taking; the bundling of securities based on a Ponzi scheme and then sold to investors who are assured by ratings agencies that the securities carry a certain level of risk, when in fact, neither the financial institution that created the instrument nor the agency rating the instrument nor the investor buying the instrument understands the instrument and the probability of being repaid is what got us into this mess to begin with. If you can’t comprehend this simple truth I don’t see why anyone should treat anything written in your post as credible.
Corporations do not create jobs. Small businesses do. Your love of corporations is bafflingly stupid and enormously naive’. The risky behavior that regulation will attack is the dark pools of connivance that serves no purpose other than to siphon cash out of the economy into the wallets of greedy bankers. You know nothing about what you write. Do some homework!
Ethan, you obviously have scant knowledge of how the economy works and the elements of risk. Speculation is what Obama is addressing, not risk taking. What is the difference?
Speculation usually entails 1) using someone else’s money, 2) leveraging the initial capital (investors, bank’s, etc.) with borrowed money, 3) extreme short duration in holding period, often under a day.
Speculation destroys the economy, esp. since it shifts much needed capital to basically a bet. Day trading and program trading now constitute often over 50% of the NYSE daily trading. This has nothing to do with building companies, creating jobs, growing the economy.
Entrepreneur risk is entirely different: 1) entails your own money and TIME, 2) leverage is nearly impossible for start-ups, 3) often time horizon is up to 5 years, and it is not a -0- sum game where there must be a loser to have a winner.
Get your facts straight if you are going to write article here. Otherwise you sound like the PR department for Goldman Sachs.
Hello acetracy,
Mr. Epstein is just having you on. It is the presidents job to “take Care that the Laws be faithfully executed” including those laws which regulated banking activities. Mr. Epstein knows this as well as everyone else. All of Mr. Epstein’s posts are similarly structured, with absurd statements and wild, illogical, and counter intuitive conclusions. He just gets a giggle watching people get their underwear in a bundle responding as if he were serious.
In response to another comment. See in context »I’m no economist, Ethan. But in my view there’s a fundamental illogic to your argument. It’s as simple as this. Banks didn’t take risks with THEIR money. They took risks with OUR money, mine and yours. First they extended mortgages to people who could never repay them. Then they bundled these and sold them off. They brought the entire country to the brink of Depression. Now they’re hoarding money, giving next to nothing in interest rates, tightening credit, giving out bonuses from the TARP money they took in and, generally, dissing the public. The bankers truly have fleeced the common man. And you want them to have unlimited risk? It’s one thing to allow people to determine their own risks — whether through smoking or eating too much. It’s another to let people increase others’ risks. Should we allow people to drive drunk? Maybe you believe yes. It’s sort of the same argument.
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You don’t understand Obama’s proposal. It would prevent bank holding companies from investing securities on their own behalf (they would still be able to invest on behalf of their clients). In other words, it would return us to the laws that were in effect until 1999 when parts of the Glass-Steagall Act were repealed. The American economy functioned well before bank holding companies were allowed to speculate with our money, and it will function well again when they are stopped.
Ok, maybe it’s time to revisit why we have a “Federal Reserve”? Obama is just providing more of what he dished out in his previous career: lip service.
Quit thinking his policies are intellectually honest or even helpful. Smoke, mirrors and overpriced used cars is what he offers.
“Step right up folks…..”
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