Obama "carpet bombs" NY - Empire Center for Public Policy

You’d think the author of a well-received new book slamming the “too big to fail” doctrine and calling for smarter financial regulations would find something to like in President Obama’s proposal to break up big banks. But in a New York Post op-ed today, Nicole argues that Obama’s latest gambit would leave New York with “the worst of both worlds: a smaller Wall Street that still poses the same risks to the global economy.”

Instead of suggesting needed rules to curb financial risk, Nicole says, “a panicked president has ordered up carpet-bombing, with Gotham squarely in the line of attack.” She continues:

Ending “too big to fail” is indeed crucial. But Obama’s proposals wouldn’t do that.

They seem removed from reality and seemed to come out of nowhere, which rattled markets. Volatile markets are a fact of life, though, in an environment where the government doles out rescues and punishments, rather than providing predictable, rational rules.

The details: Obama wants Congress to put limits on banks that can borrow from the Federal Reserve and whose small depositors benefit from FDIC insurance. Such banks could no longer make speculative bets with their own funds. Firms shouldn’t take big risks “while benefiting from special financial privileges,” the president said.

Hmm. This rule would have done nothing to prevent the 2008 crisis. AIG, target of the biggest rescue, didn’t collect FDIC-insured deposits. Nor was it allowed to borrow from the Fed. The same holds true for Bear Stearns and Lehman. Goldman Sachs and the rest, which would be governed by the new rule, won Fed-borrowing privileges only after the crisis hit.