Big Bank Limit Proposals

Here's the story from the BBC:

"The plans - the most far-reaching yet -include limits to the size of banks and restrictions on riskier trading. . . His proposals also include a ban on retail banks from using their own money in investments - known as proprietary trading. Instead, banks would be limited to investing their customers' funds."

In my opinion, this is going overboard. I think some fine-tuning to the system would be more productive than tearing it down with a sledge-hammer. Think of it like a modern day surgeon vs. an 1700's pharmacist. You can either directly fix the problem, or you can let blood and cut off limbs. I guess Barack and Volcker want blood.

I saw the financial system collapse. I understand, for the most part, the main factors that contributed to its demise. But I'm just not buying that the system is totally "broken," so much so that we need to revert back to a Glass-Steagall type regulatory policy. I think future regulation should seek to create a better framework within the current system. America's new understanding (and believe me, many understand all too well,) that real estate investments won't lead to outrageous financial return, and in fact that both commercial and residential property can decrease in value, has put things in perspective. The chance of another speculative credit fueled asset price bubble occurring again in the near future is minuscule.

Hindsight is 20/20. "Risky" bank activity in 2006 was not considered risky at the time. But now conventional wisdom says otherwise. With the information we have today, firms are simply less likely to participate in said "risky" activities. Especially when the credit ratings of sub-prime mortgage backed securities accurately reflect their true risk, (i.e. no more AAA credit ratings please) . The free-market system works fantastically when people have perfect information. And to guard against future housing bubbles and the like, maybe we should regulate at the foundation, where the problems actually start. Minimum credit scores for potential home buyers? Minimum down payments on mortgages maybe? I feel like doing either of those two things would severely limit the potential for systemic risk.

Sadly, we live on a political canvas right now, where putting restrictions on the public just isn't politically feasible. Imagine if Obama told the American people, "to be approved for a mortgage, you must have a reasonable possibility of paying off that mortgage. . ." The gall of such a man! Should Americans really have to pay for the things they purchase? Politically, the answer is no, which is why we have a problem, and why we get garbage regulation proposals like the one out today.