Almost certainly the Obama administration's greatest vulnerability is its economic team. They aren't just (as the New York Times puts it ) "sympathetic to the concerns of investment bankers," they are investment bankers. Investment bankers are the guys who brought the financial system to its knees with help from friends in the two preceding administrations and Congress. Now Barack Obama has become their ally in the highest place.
Not everyone is on the side of the investment banks. Perhaps the most listened to -- the most distinguished -- among the President's advisers is Paul Volcker, pre-Greenspan Fed chairman, straight shooter and head of Obama's Economic Recovery Advisory Board.
The trouble is, Obama isn't listening to Volcker anymore. Volcker and distinguished economists who are not investment bankers are urging Obama to break up the banks or we'll be back in big trouble again in no time -- under a decade in MIT's Simon Johnson's estimation.
Paul Volcker has mounted his own campaign. That's how serious he believes the situation is.
The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children. He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations. ... Before the credit crisis, the big institutions earned most of their profits from proprietary trading, and those profits led to giant bonuses. Mr. Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices.
The White House argues that regulation will do the job. Volcker strongly disagrees.
Simon Johnson reminds us that Wall Street bigwigs, in spite of the administration's generosity to them when they were on their knees, are already distancing themselves from the administration's efforts, not to say dissing the president himself. Take the president's recent speech in Federal Hall.
"... Let me point out that the Wall Street Journal reported the next day that not a single chief executive officer -- not a single CEO of any major US bank -- attended the president's speech. Okay, so every one of them was too busy to come and hear him speak? That's incredible, right? That by itself absolutely encapsulates the arrogance of this industry. They're not grateful. They're not sorry. They don't even want to acknowledge that they messed up on a major scale. And the president -- and the president's men and women -- saved their rear ends, their companies, their jobs, their salaries, their bonuses, their pensions, their everything! It was done on amazingly generous terms. I think excessively generous terms. They can't even show up and applaud politely? Extraordinary!"
Breaking up the big financial houses would remove the "too big to fail" hazard from the landscape. Commercial banking would be detached from investment banking, as it once was. Investment banks that made risky investments would no longer be able to hold the government hostage and demand bailouts.
Alan Greenspan is against it. That alone should tell us the administration should listen to Volcker, right?
Barack Obama is a constitutional lawyer by trade. He's not an economist. He should know better than guarantee corporate entities greater safeguards than citizens. And he should know better than create an economic advisory team weighted heavily with former managers of a system which broke and destroyed the economy and allow them to determine the relationship of investment banks to the rest of the financial system.
