Following the shocking Republican win in renowned liberal state of Massachusetts, President Obama desperately tried to win the approval of his democrat supporters by announcing his purposed plan of financial reforms for the Wall Street banks.
With the uncertainty of what these new regulations will mean for taxes and compensation foreign institutions are suddenly very wary of investing in countries that are considering imposing such rules. The US, France and Great Britain are deliberately shaking the confidence in the banking sector by threatening to impose these new regulations. This is not healthy for the global economy and may even threaten the global recovery.
It may be popular to bash the banks but is it good fiscal policy? Obama has proposed to limit the size of banks and their holding companies. But as the wall street journal pointed out the “problem with limiting the size of these institutions is that no one has the faintest idea what the right size is” What is the right size that will prevent a bank from being too big to fail? Who knows? Certainly not the congress.
The next proposal is to prevent “proprietary trading”. It may sound impressive to say we will now control these out of control banks, but there are already regulations that limit what a bank can and can’t do with their deposits that are government insured. Banks can’t participate in underwriting or deal in securities. As for the bank holding companies they are using money that is not government backed and so why should the government stop them from doing what they want with their own funds?
Obama wants to stop these risky practices. However there are measures already in place that protect the banks from the riskier activities of their holding companies. All these new regulations will do is force the bank holding companies to stop doing what they do best - make money. But why stop with just the big banks - “if we are going to stop Goldman Sacks and Morgan Stanley from taking risks in securities trading because they are too big to fail, why not stop securities trading by all large investment firms or insurance companies?”(Wall Street journal)
Finally, it is important to remember why there was a financial crisis in the first place - it was caused by subprime mortgages which led to banks failing and needing to be bailed out because they had too much invested in these risky mortgages.
But if the banks are prevented from engaging in securities trading they are left with few options for investment and one their only options is real estate. The last real estate bubble was not an isolated historical event- real estate goes up and down - and so another bubble followed by a bust could cause another banking crisis if the banks are forced to concentrate their investments in this area.
“Instead of trying to punish the banking industry, Obama should try to understand why the banks became so heavily invested in real estate” Instead of enforcing punitive new restrictions “the solution to the long term problems of the banking business is not to narrow the activities of bank holding companies but to broaden them.” This is not the popular thing to do - it may look like a reward for bad behaviour but in the long run it could prevent a future crisis.
As for the Forex market, the USD is in for a rocky road. Since being sworn into office, we are have yet to see the results of president Obama’s “Changes”. With US unemployment at 10%, the country and the world want to see results not hear more talk. Obama will have to do far less talking and more successful and economically sound financial decisions for the world to resume its faith in the American currency.
