Simon Johnson on Obama's Wall Street Speech

From Baseline Scenario:

And, of course, the real issues were not mentioned at all.

1) The largest financial institutions have to be made smaller — aim to make them under $100bn in assets, roughly the size of CIT Group which even this Treasury was willing to leave to its own devices. We can do it with legislation now or by regulatory fiat next time the behemoths get into trouble, but we should do it before they ruin us.

2) The people who run banks like to talk about “skin in the game” in various contexts, but they generally have only a small proportion of their wealth at risk in these financial institutions. This is not a panacea of course, but it is completely fair to ask them to stake a large part of their fortunes. If they respond that this is not fair because all kinds of things can happen that are beyond their control, you should say, “Agreed – so split your bank up and manage something much smaller.”

3) The revolving door between Wall Street and Washington is out of control. There is no way people should be able to go directly (or even overnight) from a failing bank to designing bailout packages to benefit such banks. In any other industry, in any other country, and at any other time in American history, this would have been seen as an unconscionable conflict of interest. Let’s get our principles back and impose a 5 year moratorium on such flows in either direction.

4) The way the Fed operates means that, in the absence of tough regulation, the finance industry has at its disposal the world’s greatest ever bailout machine. Our financial elite knows this and is acting accordingly.

Brandeis was scathing about the individuals behind the financial structures. For him, it was about power and it was about control. He was appalled by how big finance operated and he worked hard – an uphill slog – to rein it in.

But Brandeis never saw anything like what we have now experienced, with regard to the amount of taxpayer money that the banks are able to expropriate when downside risks materialize. The big banks that Brandeis feared did not, in the end, dominate the 20th century. But they are back now, with unfettered power and an arrogance that spells trouble.

Ultimately, we will put the banks back in their regulatory box or they will bankrupt us all.