None of the Obama administration's banking reforms help middle-class Americans.

Making government work better.
Oct. 1 2009 11:29 AM

Break the Banks

Why don't any of the Obama administration's financial reforms help middle-class Americans?

Barack Obama. Click image to expand.

The Obama administration, which has spent much of the past year bailing out banks and protecting the markets, has done shockingly little to help the middle class that has borne the brunt of the financial meltdown. Two acts are particularly revealing. First, the administration failed to go to the mat to give judges the power to reform mortgages in the bankruptcy context. The administration barely winced as the Senate caved to the banks on this critical issue, risking no political capital to protect one of the few reforms that could have totally transformed the mortgage crisis. As the foreclosure wave continues, and as adjustable-rate mortgages hit reset points that are going to cause havoc for millions of additional families, this failure of political leadership by the administration stands as one of the early warning signs that things were amiss.

The second act is the recent—equally difficult to understand—concession to the banks, allowing them not to be required to offer what are called "plain vanilla" mortgages and other products to consumers. These products are simpler, more understandable, less ridden with fees, and less prone to long-term risk than most of what banks try to sell consumers on a regular basis. These are the very products consumers need.

Trillions of dollars of taxpayer infusions—direct cash, loan guarantees, capital purchases, policies to keep banks' cost of capital at virtually zero—have kept the banks afloat. It is amazing that the administration didn't leverage these infusions to negotiate these two simple policies that would have made banking more sensible for the middle-class Americans whose tax dollars have bailed out the banks.

The administration's failure on these two policies is symptomatic of its larger failure of vision when it comes to banking reform. The administration has spent more time worried about the musical chairs of regulatory jurisdiction than it has asking fundamental questions about what banks should be doing, what we should expect in return for the vast sums we have invested in the banks, and how discomforting it is that the banks—in an effort to forestall these very questions—are already trying to assert that things have reverted to normal. It's worth recalling that the greatest impact of the New Deal was not the money spent on particular programs but, rather, the fundamental restructuring of the banking and securities sector that President Roosevelt imposed over the objections of business leaders.


Among the advisers to the White House, only Paul Volcker appears to be asking the tough questions. Volcker is asking what banks should be permitted to do if they want to have explicit federal guarantees on deposits and implicit guarantees that they are too big to fail. Unfortunately, Volcker does not seem to have a central role in any of the critical decisions.

The administration also hasn't asked whether the banks are using the capital we have given them in ways that will generate the economic recovery we need. The administration may believe that guiding bank investment through limits or obligations would not be good policy. Yet most thoughtful observers agree that even if a precise return to a Glass-Steagall separation of investment and commercial banking may not be wise, some constraints on how banks with federal support deploy their capital are absolutely necessary.

Too many banks refuse to reform mortgages and refuse to lend to midsize companies yet simultaneously pursue the activities that do little to create jobs but do much to generate the type of paper profits that fueled the last bubble: proprietary trading, highly leveraged private-equity deals, and foreign investment. These activities are not the fuel for domestic job growth that federal dollars and guarantees should provide. They are also more likely to lead to significant losses that will once again require taxpayer intervention.

For 50 years, under a regime of careful constraints on how and to whom banks lent, we avoided a meltdown of the sort we have just suffered though. The least we should now expect is a serious conversation about where banks should be active and how we can avoid rebuilding the same system that just collapsed.

The message we should be sending is clear: If banks want to participate in the high-risk activity that generates outsize bonuses but also outsize risk, they must do so only with their own capital, separated from guaranteed deposits and a taxpayer backstop to their debt and borrowing capacity. Unfortunately, this message is not being sent. If, after all the fuss of supposed banking reform, we do not redefine the relationship between banks and their customers and redefine what banks do with our capital, we will have failed. We will get neither the real economic recovery we need nor the assurance that another round of bailouts will not be necessary in the near future.



The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Does Your Child Have Sluggish Cognitive Tempo? Or Is That Just a Disorder Made Up to Scare You?

Mitt Romney May Be Weighing a 2016 Run. That Would Be a Big Mistake.

Amazing Photos From Hong Kong’s Umbrella Revolution

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.


See Me

Transparent is the fall’s only great new show.


Lena Dunham, the Book

More shtick than honesty in Not That Kind of Girl.

What a Juicy New Book About Diane Sawyer and Katie Couric Fails to Tell Us About the TV News Business

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.

  News & Politics
Damned Spot
Sept. 30 2014 9:00 AM Now Stare. Don’t Stop. The perfect political wife’s loving gaze in campaign ads.
Sept. 30 2014 10:44 AM Bull---- Market America is overlooking a plentiful renewable resource: animal manure.
Atlas Obscura
Sept. 30 2014 10:10 AM A Lovable Murderer and Heroic Villain: The Story of Australia's Most Iconic Outlaw
  Double X
Sept. 29 2014 11:43 PM Lena Dunham, the Book More shtick than honesty in Not That Kind of Girl.
  Slate Plus
Behind the Scenes
Sept. 30 2014 10:59 AM “For People, Food Is Heaven” Boer Deng on the story behind her piece “How to Order Chinese Food.”
Brow Beat
Sept. 30 2014 10:48 AM One of Last Year’s Best Animated Shorts Is Finally Online for Free
Future Tense
Sept. 30 2014 7:36 AM Almost Humane What sci-fi can teach us about our treatment of prisoners of war.
  Health & Science
Bad Astronomy
Sept. 30 2014 7:30 AM What Lurks Beneath the Methane Lakes of Titan?
Sports Nut
Sept. 28 2014 8:30 PM NFL Players Die Young. Or Maybe They Live Long Lives. Why it’s so hard to pin down the effects of football on players’ lives.