“While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse,” Obama stated. Up to this point, nothing substantial has been done to attempt to fix the problems and avoid another crisis.
Obama called for reforms to restrict the size, trading, and specifically proprietary trading of the large US banks. This may lead to larger banks breaking up. Many of the details are still unclear and will have to be approved and worked out by Congress. Some are calling it steps to return to the Glass-Steagall Act.
The president criticized banks for taking on large risks knowing that taxpayers were their safety net. Absent however was the criticism for the government and Federal Reserve creating this moral hazard. There was nothing to address the excessive risks of companies like AIG, and GSEs such as Fannie Mae and Freddie Mac. Further, there was no mention of the Federal Reserve actions which cause higher levels of risk to be taken.
Today’s proposals are attempting to tackle many symptoms of the crisis, but not the root causes. As long as the government provides moral hazards and the Federal Reserve inflates the money supply, there will be larger risks and malinvestments, leading to boom and bust cycles as explained by Austrian economics.
The US economy continues to focus on the significant unemployment. Thus every proposal is getting the question of ‘will this increase or decrease jobs?’ At least in the short term, the speech today is being taken as a negative toward job growth.
Unsurprisingly, the S&P and bank stocks continued to decline and the USD lost strength after Obama’s proposals.
