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Bank Regulation: Sometimes Populism Is Justified

The following is a modified post from the Motley Fool Editor's blog. You can see all the posts by clicking here.

Yes, populism can be justified. Such is the case with President Obama's latest bank proposals.

After already proposing a bank tax (click here to read why it's a good idea, despite the bad PR), he's urging legislation that would:

  • Disentangle banks from hedge funds and private equity.
  • Strengthen deposit caps that limit banks' size.
  • Prevent too-big-to-fail banks from proprietary trading. 

To clarify that last point, banks that rely on FDIC insurance (for our deposits) or are eligible for crisis-time loans from the Fed could no longer try to supplement their profits by making risky trades for their own account. This would theoretically affect thousands of banks, but it's primarily the big guys who engage in proprietary trading. Read: Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Wells Fargo (NYSE: WFC  ) . It'd also extend to faux bank holding companies such as Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) .

Is this series of moves designed to curry favor with the populist masses? Perhaps. But sometimes stuff that feels good  actually is good!

This latest set of proposals is the best kind of regulation: Here's what you can do, here's what you can't. It's far superior to giving the Fed the ability to curb proprietary trading and other risky business as it sees fit. Arbitrary regulation simply doesn't work.

So it looks like President Obama is listening to one of the few financial policymakers I trust; he's deemed the proprietary trading ban "the Volcker Rule" (you can read about why I heart Paul Volcker here).

Huzzahs and high fives all around ... assuming the bank lobby and partisan politics don't 86 this.

Anand Chokkavelu owns shares of Citigroup. You can follow him on Twitter. The Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 22, 2010, at 6:28 AM, prginww wrote:

    You have confused the term populist with progressive. This legislation is not a reaction to a grass roots movement. It is a calculated political move to encourage anger in order to gain advantage.

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