President Barack Obama criticized the bonus-driven culture of financial trading desks at Wall Street banks as a risk to the stability of the financial system.
In an interview airing today on American Public Media’s Marketplace radio program, Obama said an “unfinished piece of business” is to address banks that “take big risks because the profit incentive and the bonus incentive is there for them.”
The issue is “going to require us looking at additional steps we can take,” Obama said, without specifying what those might be. [Emph. added.]
So we have Dodd-Frank (2,400 pages), the Volcker rule (900 pages), 397 other new rules (I won’t even try), and President Obama thinks the re-regulation of the banking industryhasn’t gone far enough? Actually, how can he even know? Of those 398 rules mandated by Dodd-Frank, just 208 have been written and finalized, according to Davis Polk, while fully 98 haven’t even been proposed yet. The law, remember, was signed by the president in 2010. Here, four years later, it’s not even close to being fully implemented.
Yet the president now says he wants to implement even more regulation! On the one hand, he may simply be delusional. The “big risks” he worries banks are taking are largely out of the system already, at least on the trading side, thanks to the Volcker rule. On the other hand, if he thinks banks’ current lending standards are too risky, too, he really ought to sit down and have a talk with his regulators. That’s because 1) lending standards,especially mortgage lending, are still in post-crisis freakout mode and so are inordinately conservative, and 2) he doesn’t need new legislation for regulators to clamp down on what they deem unsound lending practices.
The likeliest explanation for the president’s odd remarks is that he’s deeply suspicious of the “the profit incentive and the bonus incentive” to begin with. He just doesn’t like the idea of bankers making too much (or any) money. He’s right of course, that the mismatch between a banker’s near-term incentive and the long-term performance of a financial instrument that banker creates can have catastrophic results. Through tools like clawbacks, Dodd-Frank goes a long way to resolving that mismatch. Then again, lending directed by the public sector, which the president presumably prefers, can be equally disastrous. If you doubt it, look no further than how the GSEs fared during the panic.
Or it could be that President Obama just doesn’t like banks. Given the central role banks play in credit creation and the creation of economic growth that’s extremely disappointing, but it seems the most probable.
What do you think? Let me know!