A little over a month ago, the President stood beside Paul Volcker and announced his intention to prevent banks whose deposits are insured by the federal government from engaging in proprietary training. It wasn’t a popular move with Wall Street, and it was certainly a move that would have had downsides, but I believed (and still believe) it was a necessary one, for reasons that were laid out well by Jim Manzi of National Review:
The reason that it is dysfunctional to have an insured banking system that is free to engage in speculative investing is simple and fundamental. We (i.e., the government, which is to say, ultimately, the taxpayers) provide a guarantee to depositors that when they put their savings in a regulated bank, then the money will be there even if the bank fails, because we believe that the chaos and uncertainty of a banking system operating without this guarantee is too unstable to maintain political viability. But if you let the operators of these banks take the deposits and, in effect, put them on a long-shot bet at the horse track, and then pay themselves a billion dollars in bonuses if the horse comes in, but turn to taxpayers to pay off depositors if the horse doesn’t, guess what is going to happen? Exactly what we saw in 2008 happens. . . .
Make no mistake, many banking executives right now are benefiting from taxpayer subsidies. Even if they pay back the TARP money, the government has demonstrated that it will intervene to protect large banks. This can’t be paid back. And this implicit, but very real, guarantee represents an enormous transfer of economic value from taxpayers to any bank executives and investors who are willing to take advantage of it. Unsurprisingly, pretty much all of them are.
I gave the President a lot of credit last month for taking this step. As it turns out, that was premature of me, because he’s now caved to Wall Street, double-crossed Volcker, and abandoned the plan in favor of one amenable to J. P. Morgan and “Government Sachs” (Goldman Sachs was the second-largest donor to the Obama campaign, and J. P. Morgan CEO Jamie Dimon is a particularly powerful and important Obama backer). I suppose his decision two weeks ago to publicly endorse the multi-million-dollar bonuses given to Dimon and Goldman Sachs CEO Lloyd Blankfein should have been a tipoff that President Obama wasn’t going to have the spine to stand up to them and put the Volcker Rule through; after all, crony capitalists never bring the hammer down on their cronies, only on businesses that don’t support them.
As such, the President’s bold announcement last month now joins his promise that “if you like your current health insurance, you can keep it” and his pledge not to raise taxes on households making less than $250,000 a year in the dustbin of political expediency. Lesson once again: don’t take this president’s word on it until it actually happens.