Bankers do not want a fight with a President seeking cheap political capital; they want to turn profits and do business. Obama’s proposals frustrate that aim - by carving up corporations and neutering investment banking on the grounds of excess risk. As Iain Martin notes, Obama has departed from the G20’s emerging narrative, and though the details are imprecise there is no doubt of the direction Obama is headed. It is the wrong one. As a leader in The Times puts it:
‘But banks created the crisis not because of size but out of cluelessness. A typical bank is many times more highly leveraged than a hedge fund. It is better to limit banks’ borrowing than restrict their activities. An integrated bank, combining retail and securities businesses, can generate economies of scale and thereby make higher profits. The crisis has demonstrated that there must be more things for a bank to achieve than returns for shareholders. But there is no sense in placing limits on banks that contribute little to the stability of the financial system while making it more difficult to turn a profit.
In the UK, the Treasury, the Conservatives and the Liberal Democrats have all welcomed Mr Obama’s proposals. Theirs too is a short-term populist response with little economic logic. A thriving financial services sector is essential to an efficient economy. Tight financial regulation is essential, but badly designed measures will merely drive business to other banking centres.’
Of course retail and ‘casino’ banking should be split so that depositors are protected, and banks should pay for the insurance they have received from taxpayers. Sterner measures limit business and demolish confidence – a point proved succinctly by the market’s reaction to Obama’s speech.
Bankers deserved ire and credit remains paralysed as banks have used Gilts to re-balance their books. That needs to be addressed, but politicians have resorted to playing politics with the institutions upon which growth and recovery depend.