Obama and the Banks

Originally posted

The Lighthouse

Volume 12, Issue 5: February 1, 2010

President Obama’s populist jabs at big banks, one theme of last Wednesday’s State of the Union address, were unwarranted and misplaced, according to Independent Institute Senior Fellow Alvaro Vargas Llosa. Obama’s proposed tax on non-deposit bank liabilities punishes banks for borrowing too much money—whereas a proximate cause of the real-estate bubble was that the banks were lending money too freely. Also, Obama proposes to create a super regulatory agency to break up banks deemed “too big to fail”—whereas a simpler, more effective policy would be simply to let insolvent banks fail.

Obama’s proposal to prohibit financial institutions from trading their own money is also unnecessary: “The truth is that proprietary trading had little to do with the credit bubble, which mostly involved the customers’ money,” Vargas Llosa writes in his latest column. Worse, the Obama administration has avoided serious discussion of a root cause of the credit bubble: the Federal Reserve’s easy money policies.

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