While I applaud the president’s heightened interest in financial regulatory reform, both ideas have flaws: the bank tax is unfair and will probably be no more effective than the UK bonus tax, while the ban on proprietary trading would have virtually no impact on the risk-taking that caused most bank losses during the crisis.
Even so, generating energy around the cause of reform is helpful. So are Mr Obama’s consultations with Paul Volcker, the former Federal Reserve chairman, who is recognised around the world as America’s most trustworthy guardian of the public interest on financial market issues.
So while the most recent ideas coming from the White House are controversial, they provide an opportunity to begin a meaningful discussion on how to address the real causes of the past crisis, and prevent future ones. The key is to move beyond populist appeals and get the substance right.
First, it is essential that the president and Congress co-ordinate their proposals with those of other major financial markets to minimise regulatory arbitrage. The US has held a long-standing leadership role on these issues, but that leadership position should not be taken for granted. Unfortunately, meaningful efforts have yet to be made to develop the essential global regulatory harmony.
Second, the president and Congress must define clearly the kinds of institutions and markets requiring oversight, and the extent to which regulators should be empowered to do their work. Some market participants operate with minimal oversight for good reason; some, such as credit ratings agencies, require far more regulatory review. We need to assign regulatory oversight based on which areas of the financial markets can create and accelerate systemic risk, not who has the best lobbyists in town.