Originally posted on April 22, 2010.
President Obama traveled to Wall Street today in order to deliver some “tough talk” in efforts to promote the financial regulation reform bill expected to be introduced in the Senate next week. Back in January, Obama pledged that taxpayers would never be forced to bailout another failing bank,
Never again will the American taxpayer be held hostage by a bank that is too big to fail.
Obama claims that it’s necessary to crack down on the irresponsibility of the institutions on Wall Street that
gambled on risky loans and complex financial products.
This morning, Obama asserted in front of Wall Street,
I believe in the power of the free market.
Following Obama’s rhetoric, large banks will be rightfully allowed to fail. After all, the free market punishes irresponsibility and poor decisions. It rewards those that have proper risk management. However, the financial regulation reform bill that Obama is pushing does not punish banks that make unwise and risky investments. Instead, it rewards them with unlimited taxpayer money.
For the past 25 years, the feds have bailed out banks that have suffered from large losses. Inevitably, this causes a moral hazard, banks behave differently than they would behave if they were actually allowed to fail. Banks have more incentive to engage in high-risk and high-reward positions. If they succeed, they are rewarded by the market. If they fail, they are rewarded by the government through taxpayers. It’s a win-win scenario.
According to Manhattan Institute fellow Nicole Gelinas the 1,408 bill will only increase taxpayer bailouts of large banks,
It says that failed financial firms must repay taxpayer money ‘unless the United States agrees or consents otherwise.’ It says, too, that Washington can bail out bondholders to financial firms as long as officialdom ‘determines that such payments or credits are necessary or appropriate to minimize losses.’ Wall Street will read this as a capitulation: Despite Obama’s pronouncements, bailouts will still come when ‘necessary and appropriate.’ And bailouts will be ‘necessary and appropriate’ during the next crisis — a crisis created by this very expectation.
Despite Obama’s words, he’s certainly not getting “tough” on Wall Street. The bill guarantees that Wall Street will receive more taxpayer handouts whenever necessary and appropriate if they engage in risky decisions and fail. Under the financial regulation reform bill, the risky behavior of Wall Street will only continue while increasing our chances of future financial crises.
Here’s a fun video from the Republican National Committee that states that “the party on Wall Street has just begun.”