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Obamanomics: The Good, the Bad, the Weak

On bank regulation, the White House goes too far, and not far enough.

| Wed Jun. 17, 2009 9:07 PM EDT

The Weak

Obama blames the financial crisis on a "culture of irresponsibility," but the absolute worst of his new proposals is to give the Fed more authority. That's like rewarding the king of this irresponsible culture, or at least its chief banker and liquidity provider, with a larger kingdom.

The biggest bank bailouts of all went to Citigroup, which grabbed $388 billion in public assistance, and Bank of America, which scored $220 billion—as much as AIG. And who was their regulator? The Fed.

So the OTS gets annihilated for its failure vis-à-vis AIG, but the Fed gets rewarded. Why? Because the Fed, while not a fully public agency, is the banking system. During the past 15 months, it has amassed $7.9 trillion worth of facilities and other entities through which it has lavished cheap loans in return for questionable collateral from banks. It has kept the true nature of these transactions a secret despite numerous FOIA requests. And it has actively promoted the creation of bigger financial institutions in a chaotic environment, rather than putting the brakes on the creation of these giants.

Yet under Obama's plan, the Fed would be crowned as the supreme systemic-risk regulator, supervising the largest and most interconnected firms. This is plain wrong. It rewards an entity that neglected its regulatory obligations to begin with, that paid unprecedented sums to correct its mistakes, that never exercised its ability to contain the size of banks—blessing rather than questioning those that would become "too big to fail" (or to regulate)—and that shunned transparency. This is not the way to stabilize and provide necessary responsibility to the system.

Rather than regulate a complicated industry by creating more regulatory layers and giving more power to the Fed—which deserves its own stringent audit—a more lasting solution would be to restructure the banking industry itself. The smart move would be to divide banks once again into separate consumer and investment entities. This would make them far easier to regulate, and alleviate the need for government to play catch-up—and subsidize ever larger, more complex firms.

Yet as long as the Gramm-Leach-Bliley Act of 1999 (which repealed Glass-Steagall, and then some) remains intact, and as long as the Fed serves as marriage counselor and financier for the banks, then investment houses, commercial banks, S&Ls, and insurers can and will continue to merge operations. That fact alone renders it extremely difficult to monitor and control our banking system, or to achieve the stability Obama promises—and the rest of us seek.

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