Obama Keeps Banks in Crosshairs: Today's Outrage

I have no idea how Obama can cap the size of a bank without onerous government involvement that will erode the free market principles of the United States
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(Updates with details of Obama's plans to rein in banks in 5th paragraph).

WASHINGTON (

TheStreet

) -- President Obama just can't seem to forgive the banks for distracting him from his domestic agenda.

Having been forced to spend so much of his time and political energy on the bank bailout, he is determined to reduce the threat of another financial crisis by shrinking down the big banks so they won't pose so much of a risk.

One way or another, Obama wants to scale down the megabanks such as

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Citigroup

(C) - Get Report

,

Wells Fargo

(WFC) - Get Report

and

Goldman Sachs

(GS) - Get Report

.

Last week, Obama came out with his proposed

bank tax

, targeting the biggest banks in the country (many of which have already repaid bailout funds) in order to cover the cost of any badly managed institutions that may try to bilk taxpayers.

Now Obama is seeking to

limit the size of banks

and rein in the risks they take.

Obama said his administration would work with Congress to ensure that any financial institution that contains a bank does not "own, invest or sponsor" a hedge fund, private equity fund or proprietary trading desk "unrelated to serving customers." The president also said he would work to limit consolidation in the banking industry, which some believe has made certain institutions "too big to fail."

I have no idea how Obama can cap the size of a bank without onerous government involvement that will further erode the free market principles of the United States.

The trade restrictions, however, I can understand. In fact, there are many precedents for that.

This idea -- championed by former

Fed

Chairman Paul Volcker -- is similar to the Glass-Steagall Act, passed in 1933 in response to the risky banking practices (like using depositors' funds without their knowledge to trade stocks for the bank's own account). It was shenanigans like that led to the Great Depression.

Over the years, though, we forgot the pain of the Depression and started watering down those limitations and they ultimately faded away. Then, not surprisingly, things got out of hand, the system collapsed and we're talking about the same kind of regulations once more.

The difference is that back in 1933 the government's intervention was limited to setting new playing rules, a time-honored regulatory function, and then getting out of the way.

This time, the reactionary, punitive response seems to be going well beyond any previous government intervention in the markets.

Obama needs to recognize that it is impossible to eliminate risk and we wouldn't want to do so if we could. Why? Because without risk there is no reward.

We can, and should, try to find the right balance between limiting risk and limiting rewards.

That's what I consider good government.

--Written by Glenn Hall in New York.

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