President Obama announced Thursday that he wants to prohibit banks from forming hedge funds, private equity funds and trading securities on their own accounts, and he wants to limit the size of banks and financial institutions generally.
Hedge funds, private equity funds and proprietary securities trading did not cause the banks to get into trouble, and the size of banks did not cause the credit crisis.
Banks, small and large, failed or required bailouts because of poorly considered loans, and the kinds of engineered products that were created from those loans by non-bank entities.
Collateralized debt obligations and swaps created and marketed by non-bank financial institutions, such as Lehman Brothers and
, compounded the errors of foolish bankers.
Later, Goldman Sachs and other financial institutions became banks to access inexpensive credit from the
, but those decisions could be reversed if bank holding companies are not permitted to trade on their own accounts.
Prohibiting securities trading by banks and limiting the size of the banks would not keep those mistakes from happening again.
Many smaller banks invested in risky securities such as commercial mortgage- backed securities. They did that and could do it again without a proprietary trading arm.
Large banks failed or required bailouts, because they continued to hold residential mortgages, residential mortgage back securities and credit card and auto loans that soured. Bad loans will sink a bank, regardless of whether it is owned by a holding company that trades securities on its own account.
The president's statement on bank policy does not demonstrate a clear understanding of the causes of the credit crisis, and more importantly, it does not chart a clear path to reforms that would keep another crisis from occurring.
The president's statement appears intended to distract public attention from record profits and bonuses on Wall Street, and from his political troubles.
Coming on the heels of news that 450,000 Americans continue to file for first time unemployment benefits each week, and the Democrats loss of a special senatorial election in Massachusetts, President Obama's statement on bank reform appears political and disingenuous.
One year after taking office, the administration should demonstrate a better understanding of the causes of economic crisis and articulate confident solutions for unemployment.
The Obama team simply does not have a grasp on the nation's economic problems.
Professor Peter Morici is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.