A crack down on risk taking--not really

Reuters:

U.S. President Barack Obama will propose stricter limits on financial risk-taking on Thursday in his latest populist-tinged move to crack down on banks and address the roots of the financial crisis.

The president will make the announcement at 11:40 a.m. (1640 GMT). The guidelines, which are expected to be broad and would require congressional support, are part of measures to revamp the country's financial regulatory system.

The move comes on the heels of Goldman Sachs Group Inc's report of stronger than forecast fourth quarter profit.

"The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with the House and Senate to work this into legislation," a senior administration official said.

Proprietary trading refers to a firm making bets on financial markets with its own money, rather than executing a trade for a client.

The White House has blamed the practice for reckless gambling on the U.S. property market which resulted in massive losses that almost destroyed the financial system in 2008.

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This strikes me as willful ignorance at best. The problem that triggered the financial debacle was created in Congress and in agencies that pushed for loans to people who could not afford them. The banks never pushed for that sort of thing because it was never in their interest to make loans that could not be re-payed. But, the lending decision was taken away from the lenders and put into the hands of brokers and realtors who suffered little consequences if the borrower did not repay. The banks lost huge amounts of money because of these failures, but they were failures imposed on them by Barney Franks and Chris Dodd and other Democrats.

Restricting institutional investment accounts will hurt the liquidity of the market place and do little to halt the problem of risk. Democrats are still pushing for bad loans in the housing market despite what has happened.

There was a problem of risk analysis in dealing with the financial instruments used to fund the bad loans that the Democrats were pushing. This was not because the institutions were eager to take on more risk. It was because they failed to comprehend the nature of the risk and the resulting liquidity problems. They hired experts called Quants to deal with these risks and the formulas they used failed them.