A day after the Obama administration proposed its new set of financial rules, reality is setting in. I'm not seeing anyone who thinks it's particularly dangerous to split off prop trading from client service, or to impose limits on total bank liabilities. But there's a lot of skepticism that anything like this can pass. Folks like Chris Dodd and Chuck Schumer will have a lot to say about this, and they aren't interested in making life difficult for their constituents in the financial services industry--especially not Dodd, who's going to need his friends after he retires.
This is a good idea, but cutting back on prop trading, in particular, is going to be hard. Goldman Sachs has told me repeatedly that they don't have prop trading: everything they do is ultimately for the benefit of their clients. Absent a corner of the trading floor with a big flashing "prop desk" sign above it, in practice it's very hard to draw the line between the kind of daily trading that any broker dealer has to do, on the one hand, and proprietary trading for a bank's own account, on the other. Both of them involve the bank taking risk and making money, after all.
Felix later adds that if this gets regulators up in the face of the prop trading desk, it's a good thing. But I'm with Economics of Contempt: our regulators are overburdened as it is. If we want them to get up in the face of the prop trading desk, we should be tripling the budgets of the regulatory agencies, and taking them off government scale so we can pay them something kind of vaguely competitive with what Wall Street pays. It doesn't do any good to give them more power if we don't give them a lot more capacity to wield it.
For some reason, however, people freak out when you say that the SEC employees should get paid hundreds of thousands of dollars a year. I've been told more times than I can count that we don't want people who are just in it for the money. But try to look at it the other way. For someone who really understands securities regulation to go to the SEC--or stay there--they have to give up hundreds of thousands of dollars, not to mention a workplace where they get treated nicely. If they have to live in New York, as many of them do, that's a huge sacrifice. You're talking about the ability to put your children in good schools, or have a commute no longer than an hour. It's not reasonable to demand that from people, and even if it were, you wouldn't get it.
We clearly need some new financial regulations. But let's start with some new regulators. That shouldn't be hard for anyone to agree on.