Tuesday, January 26, 2010

Mark Gimein: Reckless trading is not the cause of bank failure

He writes:
The two-year-old story of the Société Générale scandal is worth recalling now, as the Obama administration—responding to the chorus of public outrage over Wall Street failures—rolls out yet the latest plan to set the U.S. financial system back on a firm footing. The centerpiece of the new plan is a proposal to get commercial banks—those stolid bulwarks of the financial business—out of the perilous, bonus-happy business of proprietary trading—that is, trading with the bank’s own money. The new agenda is the administration's answer to what has become a potent and popular narrative of the financial crisis, a delicious story of gamblers in suits carelessly rolling the dice with billions of dollars that the taxpayers will have to repay.

In the current telling of the history of the crash—a version promoted tirelessly by Paul Volcker, the president's ascendant economic guru—what cast our financial system into disarray was stodgy commercial bankers yielding to the temptations of investment banking and, especially, trading. Hatched against the background of public outrage, this tale drives the new banking outlook—and now obscures the memory of what caused the crash in the first place.

An equal affront to memory is the Obama team’s attack on the sheer bigness of banks. For the last two years, as the credit crisis engulfed the banking system, making banks bigger was actually part of the government’s effort to fix the crisis. The directive from policymakers at the Treasury Department and the Federal Reserve was merge, merge, merge.

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