NYT Economix blog: Will Obama Push for Financial Stability?

[flpoljunkie]

June 10, 2010

Will Obama Push for Financial Stability?
By SIMON JOHNSON

The official reconciliation process between Senate and House financial-regulation bills will begin next week, but the behind-the-scenes maneuvering and intense lobbying is already well under way. The main remaining question is whether the final legislation will ultimately make the financial system at all safer than it was in the run-up to the crisis of September 2008.

How do big banks repeatedly get themselves into so much trouble? Dangerous banking in today’s world involves banks trading securities and, in that context, taking positions — that is, betting their own capital. For example, almost all the profits made by big banks in 2009 came from securities trading. When market conditions are favorable and traders get lucky, the people running these banks (and, hopefully, their shareholders) receive tremendous profits. But when this same risk-taking behavior results in big losses, the major negative impact is felt in terms of a major recession, raising government debt and sharply lower employment.

“Wall Street gets the upside, and society gets the downside” is an old saying now more relevant than ever. This asymmetry in incentives explains how smart people with concentrated financial power can cause so much damage — as the Bank of England, among others, has demonstrated.

The Merkley-Levin approach leaves client-focused trading (buying and selling securities for others) where it is now within the big banks, but would exclude the inappropriate use of proprietary capital across all types of financial instruments — not just derivatives. The Merkley-Levin amendment gathered great momentum in the Senate and would almost certainly have prevailed in a floor vote, but through some parliamentary maneuvering, no doubt abetted by banking lobbyists, it was denied a vote.

Within the reconciliation process, Merkley-Levin still has a chance, although the precise odds depend on how hard the White House wants to fight. The president announced the Volcker rule to great acclaim in late January, but unfortunately the detailed follow-up by his own team was lackluster at best. Senators Merkley and Levin stepped into the political and legislative gap, pushing hard for at least some version of the Volcker principles to be adopted in Senator Christopher J. Dodd’s bill.

They were turned back at every stage but have remained doggedly on message. Ultimately, this comes down to President Obama. Is he willing to put his political capital seriously into play? Or is his newfound (and oil-spill inspired) rhetoric against runaway corporate power and pathetic regulation at best completely empty and at worst a smokescreen for continued abuses?

We will learn a great deal in the coming weeks, not just about the future stability of our financial system, but also about what President Obama really stands for.

http://economix.blogs.nytimes.com/2010/06/10/will-obama-push-for-financial-stability/