The White House Acts Out Against Wall Street

The U.S. president restores the spirit of the restrictions of the Great Depression to the banking sector.

Yesterday in the U.S. they were expecting a statement from President Barack Obama. It concerned the regulation of the country’s banking sector and it carried not only financial and economic significance, but political importance as well. Obama is attempting to seize the initiative from the Republicans, who continue to celebrate the victory over the president’s candidate in elections in the state of Massachusetts. Experts believe that if the proposed measures become reality, it could cause the withdrawal of American banks from Russia and price declines in the Russian market.

President Obama intends to introduce restrictions on the size of the largest banks, as well as on the risks they can take. According to the Wall Street Journal, the purpose of the president’s initiative is to prevent banks from becoming so large that they create a risk to the economy and counteract the normal effects of competition. For the first time, Obama publicly supported the proposal of former U.S. Federal Reserve Chairman Paul Volcker, who advocated for the introduction of restrictions on commercial banks from trading securities for their own accounts. As a result, this could lead to the restoration of a clear dividing line between commercial banks, which practice traditional activities like granting loans and holding deposits, and investment banks, which engage in more profitable but riskier trading and the insurance of securities. This measure resembles restrictions imposed on financial institutions at the time of the Great Depression.

Nobel Laureate in Economics and Columbia University Professor Joseph Stiglitz has repeatedly spoken of the need for a solution to the fundamental problems in the American banking system. Last fall he stated, “In the U.S. and many other countries, the largest banks, which are too big to fail, have grown even bigger. The problems have only intensified compared to the pre-crisis year of 2007.” Volcker also advised Obama to reduce the size of the banks. It is known that the U.S. government had to allocate hundreds of billions of dollars to rescue the banks during the mortgage crisis.

However, government assistance to Wall Street bankers continues to cause serious discontent among voters. The latest loud splash occurred this week in Massachusetts, a traditionally Democratic state, where Republican candidate Scott Brown was elected to the Senate. According to observers, the dissatisfaction of taxpayers that the federal government continued to spend their money to help wealthy bankers played a role in the defeat of Democratic candidate Martha Coakley. Obama’s speech, it appears, is an attempt to win back points from Republicans in the eyes of voters.

However, judging by the initial reaction according to polls by economic publications, not everything he does is being well received for the time being. Some approve of his programs, noting that the largest banks that pose excessive risk must pay to make the system more reliable in case of failure. Others are outraged that “Marxists” in the Oval Office and Congress are able to destroy the few large banks that remained afloat after the crisis.

Professor Alexei Krasavin of the S.U. Graduate School of Economics, in an interview with Nezavisimaya Gazeta, noted that announcements of these measures by Obama were long expected. Then-President George W. Bush promised to undertake such actions in 2007. In the event of the realization of Obama’s program, according to the expert, American banks will raise interest rates on loans to non-residents, and they will become more difficult to obtain. He did not dismiss as a possible consequence the withdrawal of American banks and their clients from the Russian stock market, which would lead to a decline in quotes.