A couple quick points about Obama’s Wall Street reform speech yesterday:
1.) While you never know how the politics are going to play out until the legislative fight gets going, it looks like the administration has a pretty good handle on where the major PR battle will be and is preparing accordingly (unlike, say, health care and death panels). That’s the consumer financial products regulator, of course. It was the first proposal Obama discussed yesterday, and he came out swinging against would-be prevaricators:
Now there are those who are suggesting that somehow this will restrict the choices available to consumers. Nothing could be further from the truth. The lack of clear rules in the past meant we had the wrong kind of innovation: The firm that could make its products look the best by doing the best job of hiding the real costs ended up getting the business. For example, we had "teaser" rates on credit cards and mortgages that lured people in and then surprised them with big rate increases. By setting ground rules, we'll increase the kind of competition that actually provides people better and greater choices, as companies compete to offer the best products, not the ones that are most complex or the most confusing.
2.) Though it wasn’t a new detail, it was good to see Obama prominently hit on the importance of higher capital requirements for systemically important institutions. Short of making them smaller and less connected, this is probably our best hope for preventing massive meltdowns going forward:
And that's why we'll create clear accountability and responsibility for regulating large financial firms that pose a systemic risk. … We'll also require these financial firms to meet stronger capital and liquidity requirements and observe greater constraints on their risky behavior.
3.) About that idea of making firms smaller and less connected--I still think it’s pretty important. Which brings me to the one discouraging portion of the speech (though, again, it didn’t come as a surprise): The administration’s unwillingness to engage on this question. Instead, Obama spoke about “resolution authority” as though it were an alternative to shrinking and disentangling institutions:
Even as we've proposed safeguards to make the failure of large and interconnected firms less likely, we've also created -- proposed creating what's called "resolution authority" in the event that such a failure happens and poses a threat to the stability of the financial system. This is intended to put an end to the idea that some firms are "too big to fail." For a market to function, those who invest and lend in that market must believe that their money is actually at risk. And the system as a whole isn't safe until it is safe from the failure of any individual institution.
Don’t get me wrong--I think the government should have resolution authority, too. (Basically, it allows the government to unwind a financial institution and sell it off in pieces while protecting depositors and maybe some creditors.) But I still have a hard time believing that an institution as big as Citigroup or Bank of America would be allowed to fail, at least as we normally understand the term, even with resolution authority. They strike me as much, much too complicated to resolve in any reasonable period of time. The way to make sure shareholders and bondholders understand their money is actually at risk is to prevent firms from becoming too big (and interconnected) to fail, and downsizing the ones that are already there.