Indelicate Questions . . . [Nicole Gelinas]
President Obama promised today that "never again will the American taxpayer be held hostage by a bank that is 'too big to fail.'"
To that end, he pledged to work with Congress to prohibit commercial banks, whose smaller depositors benefit from FDIC insurance, from owning, investing, or sponsoring a hedge fund, private equity fund, or proprietary trading operations.
"It is not appropriate" for banks that indirectly benefit from FDIC insurance of their depositors to "turn around and use that cheap money to trade for profit," the president said.
Obama needs to explain how, exactly, such a prohibition would have prevented or alleviated the financial crisis in any significant way. Consider:
* Bear Stearns did not rely on FDIC-insured deposits. Yet the government had to bail it out in March 2008 (indirectly).
* AIG did not rely on FDIC-insured deposits. Yet the government had to bail it out in September 2008 (directly, and often).
* Lehman Brothers did not rely on FDIC-insured deposits. Yet the government's failure to bail it out in September 2008 set off a mass-scale panic.
* Non-bank money-market funds (by definition!) do not rely on FDIC-insured deposits. Yet the government had to guarantee them against losses in September 2008 to avert a run.
Obama's proposal would be brilliant — save for the needling inconvenience that it has nothing to do with reality.
— Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of After the Fall: Saving Capitalism from Wall Street — and Washington.
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