Six bank regulation policies. Four reform themes. Three rhetorical hedges. Two "failure of responsibility" scolds. One "false choice" rejected. What do you get when you add it all up? An important, if predictable, financial regulation address.
President Obama's banking reform speech in New York City today was a bit like an opening lecture for Financial Reform 101: low on fiery rhetoric, high on professorial platitudes, and more wide-ranging than deep. (Read it here.)
For those counting at home, the president named six major policies: resolution authority to wind down failed banks; a bank tax; the "Volcker Rule" to shrink large banks; derivatives reform; a consumer protection agency; and new shareholder powers. He grouped these policies under four large themes: protecting banks from themselves; protecting consumers from banks; shining light into the shadow banking industry; and giving investors say on executives' pay.
But it's noteworthy that not all of the policies he mentioned are actually in the bill. For example, he calls for a bank tax to cover the losses from TARP (even thought the losses in TARP aren't from Wall Street banks). Sen. Chuck Schumer is running around Washington trying to drum up support for such a tax, but it is not in the bills. Ditto for the details of the Volcker Rule, which would attempt to limit banks' risk-taking. Bank regulators are instructed in the bill to determine how to implement the Volcker Rule, says Doug Elliott of the Brookings Institution, but we don't know what those rules will look like.
The president stayed true to his rhetorical roots by hedging his criticisms of Wall Street with vague praise for banks. "I believe in the power of the free market," he assured his audience. "There is a legitimate role for these financial instruments in our economy," he said of complex derivatives. The public might not have a lot of sympathy for the suits in the Financial District. But the president just isn't comfortable serving a plate of vegetables without a little comfort food, even if Americans consider his audience of bankers to be quasi-demonic.
Two more notes on rhetoric: the "failure of responsibility" theme at the beginning of the speech is classic Obama, and it recalls his inaugural address, "A New Era of Responsibility." I want to point to this in particular: "We do not have to choose between markets unfettered by even modest protections against crisis, and markets stymied by onerous rules that suppress enterprise and innovation. That's a false choice." Obama does this all the time: he presents two caricatures of each side's argument, and rejects them both. It's clever, but sometimes unsophisticated. This is like telling somebody considering a diet, "You don't have to choose between starving yourself by gluing your mouth shut and eating like a French goose on the morning of its slaughter." Well of course not. Those are horrible choices! Everybody would agree that a sensible diet is somewhere between starvation and binging. Too often, the options in Obama's false choices are, well, false.
At the end of the speech, Obama's conciliatory instincts get in the way of reality. Obama said: "Ultimately, there is no dividing line between Main Street and Wall Street. We rise or we fall together as one nation." But there is a dividing line between Main Street and Wall Street. You could name that line "exponentially growing profitability." Over the last two decades, financial sector profits have dramatically outpaced non-financial sector profits. Wall Street's spectacular success did not translate into Main Street's spectacular success. Instead, financial companies gobbled up 40 percent of total US profits. But when Wall Street falls, America falls. That's the hazard -- moral and economic -- at the heart of financial reform.