Bank bashing

After celebrating a year in the job and perhaps looking at his sinking approval rating, President Barack Obama has resorted to one of the best political tricks in the books – bashing the banks.

In new laws he proposed overnight, the Wall Street banking sector would be punished for its role in the GFC with new risk-reduction rules that will prevent deposit taking banks from owning or sponsoring a hedge fund or private equity fund.

He’s also suggested caps on the size of banks and their liabilities and rules that would prevent banks from proprietary trading – which is how giants like Goldman Sachs make so much of their money.

“We should no longer allow banks to stray too far from their central mission of serving their customers,” Obama told reporters, flanked by his top economic advisers and lawmakers.

“Too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward.”

The markets, quite rightly, believe bank profits will be hit hard and have responded to Obama’s plan by sending Wall Street down by 2% and the Australian market down by a similar amount.

The laws still have to get past US Congress, and you can expect the banks will launch the mother-of-all PR campaigns to block Obama’s plan.

But Obama’s big whack is likely to embolden other governments around the world to take similar action, as politicians look to score some easy points with fed-up voters.

Could Australia consider similar rules? It’s probably not beyond the realms of possibility, but as Robert Gottliebsen of Business Spectator argues today, any such moves should be regarded with extreme caution.

While we’ve been deeply unimpressed with the way the banks have treated small business during the GFC, that’s mainly to do with the global credit squeeze and the lack of viable competition in the Australian market.

Ironically, many have suggested that Obama’s proposals could force up funding costs around the world, which is likely to damage competition in the global banking sector, including Australia.

Obama has ignited a huge debate – let’s hope it goes in the right direction for Australia’s SMEs.