NYT editorial: Restarting Financial Reform

In calling for new limits on the size and activities of big banks, President Obama has given the effort to enact serious financial regulatory reform something it lacked: a rational starting point.

The premise of the White House’s earlier approach to reform was that behemoth multitasking banks were an immutable fact of life and the best way to cope with them was to ensure that their failures would not endanger the rest of the financial system. As a response to the worst financial crisis since the Great Depression, “make the world safe for giant banks” was unsatisfactory.

It ignored history, and suggested a devotion to the status quo that made real reform seem unlikely. It also ignored that large and complex banks are a problem long before they fail: an overgrown banking sector diverts resources from more productive uses and, in the process, amasses riches at the expense of everyone else. The entire country can see the evidence of that in stagnating wages, disappearing retirement savings, vanishing home equity and taxpayer-supported bonuses.

Mr. Obama’s new proposals begin to correct those problems. They would ban banks with federally insured deposits from making risky bets in the capital markets. And they would prevent the banks from owning, investing or sponsoring hedge funds and private equity funds. Mr. Obama has also called for new caps on the size of banks, to limit the damage that a failure could inflict and to promote healthy competition.

(More here.)