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Analyst: Obama's bank reform misses point entirely

One of my go-to guys here on Economy Watch is Miller Tabak equity strategist Peter Boockvar, because he's smart, fast and pithy. His morning note today is no exception.

Boockvar had a take on President Obama's attempt to rein in the nation's big banks, a plan he announced Thursday. Under the subject line, "Have we learned nothing?," Boockvar writes:

"Whether the Volcker Rule becomes law one day or banks get broken up or bankers are forced to accept five-figure paydays or long/short hedge funds are deemed legally riskier -- by some systemic risk-regulating czar -- than long-only mutual funds who get mauled in bear markets, we can all be confident that we've learned nothing about what was the genesis of the credit bubble and what can be a foundation for responsible behavior in the future. The genesis being artificially cheap money whose sole intention is to encourage borrowing, artificial demand in housing spurred on by the financing of [Fannie Mae] and [Freddie Mac] and the inability to allow failure as a result of bad decisions that can be controlled by bankruptcy law."

Okay, maybe that wasn't so pithy. It was pretty long. And its sentence construction was positively Faulknerian. But his point is salient: The cause of the financial crisis wasn't that banks were too big; that became a problem once the financial crisis began.

The cause of the crisis, Boockvar writes, is that too-low interest rates set by the Fed combined with terrible, gimmick mortgages implicitly backed by the government via the securitization schemes of Fannie and Freddie. Then, it was made worse when the government stepped in -- with taxpayer money -- to prop up the banks.

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By Frank Ahrens  |  January 22, 2010; 1:29 PM ET
Categories:  The Ticker  | Tags: Fannie Mae, Freddie Mac, Miller Tabak, Obama, Peter Boockvar  
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Next: Obama talks tough in Ohio on health-care reform, hammers big banks, channels Dana Carvey


I disagree. Obama's bank reform did not miss the point at all. The point was to sound populist. Since he can't actually be populist (which despises big government even more than big business), he's trying to catch the wave (and at the same time possibly even redirect it) as best he can.

Posted by: CincinnatiRIck | January 22, 2010 3:11 PM | Report abuse

Since Obama threatened, there has been a huge sell-off in financial stocks, which adversely affects their value. This proves the point that if the investors are allowed to determine the viability of a company, they will use the market to do it.

If the banks will use common sense and good judgement to make the loans needed, they will be able to hold up their end.

Together, this can work. Add Obama to the mix and things will go screwy again.

Posted by: whisperonthewind | January 22, 2010 3:13 PM | Report abuse

I think Mr. Volcker understands, "the genesis of the problem" about as well as anyone. But, politics being what they are, it's unrealistic to think that the gov & the fed will keep those factors (cheap money, etc.) under control for long. There'll always be bubbles followed by busts. The objective of the Volcker Rule seems to be less ambitious but more realistic, to somewhat mitigate damage from the busts.

Posted by: jefatkinson | January 22, 2010 3:14 PM | Report abuse

I love it when every once in a long while Corporate Media publishes something really worth reading. Too bad that this basic economic story does not dominate the Media spectrum twenty four hours per day, seven days per week like Michael Jackson or OJ. Please do not misunderstand me, thank you for printing this. Keep them coming……

Posted by: CodiakCurmudgeon | January 22, 2010 3:16 PM | Report abuse

The problem is allowing banks to get involved in securities. After the depression a law prevented this. We need to put those rules back in place. Any business that the government provides the bakup for or may be required to bail out should be carefully regulated. Any business that wants to be relatively free of government interference should be allowed to fail and should not have access to government programs.

Posted by: dean-smith339 | January 22, 2010 4:06 PM | Report abuse

This is ridiculous. There were many reasons for the Great Recession and while low interest rates was one contribution, it was hardly the main one. Low interest rates don't force banks to give sub-prime mortgages to people who have no hope of paying them back. Low interest rates don't force banks to package these mortgages in financial instruments that lack transparency. Low interest rates don't force banks to engage in credit default swaps. Low interest rates don't force banks to massively over-leverage themselves. This is pure propaganda to blame government for the banks' failings.

Posted by: zvelf | January 22, 2010 4:24 PM | Report abuse

This Obama must be out of mind. The more he speaks the more he hurts the economy and the stock market. This guy is a disaster. This guy is the greatest mistake this country has made since the Vietnam War. He is a simple agitator and nothing more. That is all he can do. He just makes things worse. God, if he would only resign.

Posted by: walterndebby | January 22, 2010 4:27 PM | Report abuse

History has repeated itself.

Both Presidents Calvin Coolidge and Herbert Hoover were fiscally conservative Republicans who adamantly opposed direct government assistance or intervention to alleviate private misfortunes. Coolidge, who rejected aid to distressed Texas farmers as well as the victims of flooding from the Mississippi River, even mistrusted private charities. Laissez faire was the modus operandi in business and finance (sound familar) while self-reliance represented the cornerstone of the American Dream.

Greed in the stock market (hedge funds, derivates, etc), buying on margin, and greatly inflated stock (property) valuations created a febrile system so when the market declined there was no stopping the deluge. Seventy-five percent of the market’s value disappeared on October 29, 1929, causing panic and prompting Communists and Socialists to predict the end of American capitalism.

Republican thought: America had always experienced boom and bust cycles. Frequently, the economic “panics,” as they were called, were brief and the economy rebounded with longer periods of boom. Failing to grasp the full magnitude of the spiraling Depression, Hoover and the Republicans preached correction: given time, the market would recover. Direct government intervention smacked of socialism and was probably unconstitutional.

Banking reform, similar to what is proposed today, safeguarded things until the mid-90s when the Republicans dismantled those safeguards.

Republicans allowed both the great depression and this economic disaster to happen.

Democrats got the job of turn the country around not once but twice.

PS during the Clinton administration the country produced a surplus.

Posted by: rsleonard9 | January 22, 2010 5:27 PM | Report abuse

So, the banks were not too big. Why was everyone told that they were "too big to fail?" Why weren't they just allowed to fail???

Their being "too big to fail" was the reason that of all the taxpayer money was thrown at them by the government. That money could have been used a lot of other places or not spent at all.

As a taxpayer, I say, lets have smaller banks that can fail if they are mismanaged and can go to oblivion along with all their incompetent officers.

Posted by: janye1 | January 22, 2010 5:57 PM | Report abuse

It would be great if people would accept the following assessment of our country's status so we could salvage what's left of our Republic. This speech and analysis is one of the best with the only solutions I have heard, coming from a man that has been consistent in his approach and accurate with his predictions for thirty years. I want to believe that Americans can accept the necessity for change and are willing to take individual responsibility. Please listen to all three clips and forward to your friends and family.

Posted by: igillum54gmailcom | January 23, 2010 2:35 AM | Report abuse

"The prevailing attitude of the people-as it once was in early America-must be that of liberty and self reliance, rather than the nanny state and dependency relying on government force to mold all private choices.

If this is understood, a smooth-although not painless-transition to a free society is achievable. Ignoring this option will be very destructive to everything that is dear to the hearts of most Americans.

What is it that we must do? We must immediately embark on:
• Balance the budget by reducing spending
• Change our foreign policy to that of non-intervention
• A full audit and more supervision of the Federal Reserve leading to abolishing the Federal Reserve
• Legalize competition to the Federal Reserve with competing currencies
• Regain respect for civil liberties and privacy while reigning in the CIA
• Wean ourselves off the dependence of wealth transfers by government
• Abolish crony capitalism-no subsidies, no bailouts, no regulatory or tax privileges to protect the powerful elite, especially the military industrial complex
• Eliminate the income tax, inheritance tax and taxes on savings and dividends.

None of this can happen without the restoration of Congress to its dominant position of the three Branches of Government as was originally intended by the Constitution. The Executive and Judicial must be reined in, and Congress must assert its prerogatives over all legislation curtailing all unconstitutional agendae through budgetary controls.

Signs abound that angry Americans are now more ready than ever before for a change in direction that is indeed real. If this program were improvised-even suddenly and dramatically-the adjustment, though significant and to a degree somewhat painful, would be much shorter and of minor consequence compared to the chaos and poverty that will result if we refuse to change our gluttonous appetite for a free lunch." - Ron Paul

Posted by: igillum54gmailcom | January 23, 2010 2:42 AM | Report abuse

Of course the banks are too big and need better regulation.The banks will continue to take undue risks and sooner or later fail, especially since they know that no bailout is not an option.The next failure mode will probably be different so while a thoughtful analysis of past failures is educational it is only a tactical understanding and begs for a strategic solution.If they are smaller and not "to big to fail" then they can be allowed to do so.

Posted by: busiek | January 23, 2010 12:32 PM | Report abuse

When Congress removed safeguards and changed the tax codes in the name of globalization,this was a side effect.Driven by greedy investors ,who cared nothing about AMERICAN VALUES but creating excessive profits,the economy was doomed.Excessive profit taking,has led to massive layoffs,high fees and prices.Some of these companies are robbed so badly that they have to come to governments for very cheap loans and tax breaks.Until Congress become ready to reintroduce AMERICAN FINANCIAL VALUES,WE ARE DESTROYING THE AMERCAN DREAM HERE AND ABROAD.

Posted by: mars7578 | January 24, 2010 3:26 PM | Report abuse

State unemployment agencies are avoiding huge payouts to those who have been discharged and deserve to collect unemployment. The state of Virginia has a 2 month waiting list for people who have been discharged to determine if they were discharged for misconduct, or "at will" or for no reason related to misconduct. If they were not laid off for misconduct, they get to collect unemployment. However, since the letter written to employers asking them about the condition of the layoff does not included collection of important information such as whether or not they were laid off for misconduct, those who fall into this category wait months to collect unemployment that should be granted to them. I suggest you take your eye off the banks, I'm tired of banks. What about those who are suffering through this economic crisis?

Posted by: medtimer | January 25, 2010 8:45 PM | Report abuse

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