Obama's hidden message on fixing finance: It's not important
Filed under: Economy, American International Group, INC.
President Barack Obama's speech across the street from the New York Stock Exchange this afternoon sent a blazing -- but unintended -- message: fixing what ails Wall Street is not that important.
While Obama wants to withdraw Washington's support for Wall Street and urges Congress to pass his package of financial reforms, he's doing it almost as an after-thought to what is far more important to him -- reforming health care.
Today's speech was a day short of a year since Lehman Brothers' $693 billion bankruptcy. And if it were not for that near-anniversary, it would have been far better for Obama to have given that speech after his health care push had yielded a signed bill. To be fair, his defense of the actions that pulled the financial world back from the brink was both effective and timely.
Nevertheless, I am concerned that Monday's call for a financial consumer protection agency, a systemic regulator of finance, and a derivatives exchange will quickly fade in the public's memory. And with 70 percent of the public lacking confidence in the U.S.'s ability to stop another financial industry meltdown, such fading could be politically costly.
As I posted Sunday, Obama's plan unfortunately misses the mark compared to FDR. While I like the idea of protecting consumers from Wall Street's mendacity and creating a derivatives exchange, there are flaws in both ideas. The first, fails to change Wall Street's financial incentives so the costs of misleading the public are much higher than the benefits to banker's financial well-being.
And the second -- the derivatives exchange proposal -- has a huge loophole in it which dooms it to failure. It proposes to create a public exchange for standard derivatives and lets Wall Street maintain its private exchange for customized ones. It also exempts hedge funds from participating in the public exchange. This will create the illusion of solving the problem while letting things stay the way they were when they brought, say, American International Group (AIG) to its knees.
The biggest problem with Obama's proposal is that it creates a systemic regulator for financial institutions deemed too-big-to-fail (TBTF). This is a problem because by having a systemic regulator for such TBTF institutions, it allows them to persist. And the TBTF firms are getting bigger according to Nobel Prize winner, Joseph Stiglitz.
Rather than merely requiring them to hold more capital -- a goal which will be hard to enforce -- Obama should break them up so that they're so small that their failure cannot endanger the entire financial system. Instead, his plan rewards them for failing big.
This sends the wrong message over the long-term to Wall Street -- we will let you make record profits and bonuses while the bubble expands and then when you fail -- and put the entire financial system at risk -- we'll use taxpayer money to save you and pay bonuses to your top executives.
While I thought the beginning of Obama's speech was good, I am afraid that a year from now we will find ourselves far short of the financial fix we need.
So if Monday's speech leads Congress to pass the financial reform legislation Obama proposes, in homage to Sam Walton, I will fly down to Wall Street and dance the hula in a grass skirt.
Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He owns AIG stock and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
9-14-2009 @ 1:17PM
James Reinhardt said...
Mr Cohan's comments regarding Rm. Obama's derivitatives exchange idea is on target. By exempting a major protion of the market in derivatives, the public exchange is window dressing, disguised as reform.
The idea of breaking up companies that are successful enough to become "TBTF" penalizes success and renders our financial institutions less competitive in the world financial markets, where size does matter.
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9-14-2009 @ 1:36PM
T. Rho Cost said...
What would you propose then, Mr. Reinhardt? Let these companies compromise the security and future of people's lives, with NO punitive response from anyone, not even the government, because they "won't be able to compete" in the global marketplace?
Explain to me how that works for the betterment of the "little people" whose money is in peril. Because, frankly, I just don't see it.
9-14-2009 @ 6:46PM
Denise Figueroa said...
My name is Denise Figueroa - nee - Rinehart. I haven't seen my maiden name - as close as it is - in a very long time. WOW. I thought all of us Rinehart's no matter how you spell it fell off the face of the earth. I'm not nuts just floored. Have a good one.
9-14-2009 @ 1:29PM
T. Rho Cost said...
Peter, you're absolutely on the money with your assessment. So, line me up one of those hula skirts as well.
It's funny, yes, but it's one of those jokes where you laugh to keep from crying. There's not much anyone seems willing to do because the amount of money at stake if you win is so great. Please, keep trumpeting because maybe it'll finally sink in and people will at least know what's going on.
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9-14-2009 @ 2:02PM
Verify THEN trust said...
ALL issues and Politics aside..... I sure wish THIS CEO would spend more time behind the desk !!!!! JJeessshhh .. Weds: Congress / Friday: 60 Minutes / Monday: Wall St. Leave more of this public relations to Marketing, Sales, and customer service and get down to work for Pete's sake !
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9-14-2009 @ 2:13PM
BELLCORD said...
Well judging from the public's recent comments here nothing can be done because men are greedy which was proved by FDR's inability to end the recession until he died before World War ll which was like in 1967 ..or something...
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9-14-2009 @ 2:53PM
Chuck said...
I think if this guy would spend less money flying on Airforce One and a little more time out of sight we would all be alot better off. Does he get frequent flyer miles or something.
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9-14-2009 @ 7:03PM
Joe said...
How right you are, we should just go on another vacation. Or better yet lets have a few beers on the White House Lawn.
9-14-2009 @ 3:22PM
Tony said...
As you may not know, Henry Kissinger said, "Oboma is being groomed for the ONE WORLD GOVERNMENT," so the Wall Street thing is not important!!!
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9-14-2009 @ 3:50PM
Iridium said...
IN real world capitalism when the size of a corporation endangers the welfare of all, you would break that corporation up.
The entire point of capitalism is that it encourages competition to keep corporations from growing into massive monopolies. Because we have been punishing competition and encouraging mergers through Wall Street we ended up with the too big to fail problem.
BUT THAT IS WHAT OBAMA AND THE REST OF THE ELITISTS WANT. ONE CORPORATION AND ONE GOVERNMENT ALL RUN BY THE 1% THAT CONTROLS ALL.
Breaking up the corporations that have been allowed to corrupt the system so badly that it has no future other than complete collapse is the last thing they want to do.
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9-14-2009 @ 5:58PM
Jerry said...
Every Obama plan starts out with a speech outlining more control into the Government's hand.This method expects outcry from the press and the public and so a few things are removed from his proposal. If what remains is accepted it is considered a victory and the citizens of the United States lose somemore freedom. It should be obvious: government of, for and by the people is being eliminated. We already have the SEC. This agency should be held accountable for the flim flams Wall Street puts into place with adequate punishment for failure to do so.
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9-15-2009 @ 5:42AM
Richard said...
I am biased. With what I know about this man, his limited employment history as a attorney community organizer for Acorn, his past radical associations/connections etc., His little accomplishment (to be kind ) as a Senator..and his government current takeovers, bailouts, big government, National Health Bill pending...Trillians of dollars into debt with no end in site....This Man Is giving advice?...He is one of the most left liberal Presidents we have ever had...clearly socialistic by even standard definition of the concept...He indeed has an agenda.... Do you trust this man?
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9-14-2009 @ 6:44PM
Denise Figueroa said...
President Obama is going to fix the financial mess where in but is he "you think" there on extending unemployment benefits. Most of us in this country has received our last unemployment checks, to no fault of our own. I have send out numerous resumes and for every one application they're are at lease 45 applicants. I have been out of work for close to 2 years now, that's right folks, 2 years. President Obama lives in a BIG HOUSE maybe he'll put up all of us and feed us when our landlords kick up out. He makes $400,000.00, President Obama can afford it. 2012 is right around the corner if extending unemployment benefits do not take affect by the end of Sept., 2009 I along with million are going to vote Republican. WAKE UP.
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9-14-2009 @ 7:29PM
Joe said...
Nothing matters amymore, we already lost our retirement accounts, world wide trust, just to name a few. Say why don't we just go and have a beer!
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9-15-2009 @ 7:26AM
Richard said...
Progressives, Shall we redefine the term?...Could there be any doubt as to what this president's direction/agenda could be according to these general definitions and what has been already happening in this country?
Main Entry: so·cial·ism
Pronunciation: \ˈsō-shə-ˌli-zəm\
Function: noun
Date: 1837
1 : any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods
2 a : a system of society or group living in which there is no private property b : a system or condition of society in which the means of production are owned and controlled by the state
3 : a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done
Columbia Encyclopedia entry: socialism
Socialism, general term for the political and economic theory that advocates a system of collective or government ownership and management of the means of production and distribution of goods. Because of the collective nature of socialism, it is to be contrasted to the doctrine of the sanctity of private property that characterizes capitalism. Where capitalism stresses competition and profit, socialism calls for cooperation and social service.
"The American people will never knowingly adopt socialism, but under the name of liberalism they will adopt every fragment of the socialist program until one day, America will be a socialist nation without ever knowing how it happened."
Norman Thomas, American socialist
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