too big to fail

Paul Volcker lays out his argument in the New York Times today for "Volcker rule'' -- President Obama's new proposal to rein in "too big to fail'' institutions by limiting the size of banks and keeping them out of riskier businesses like proprietary trading, hedge funds and private equity.

    But those who suspect that the proposal is window-dressing for the more tepid approach favored by Treasury Secretary Tim Geithner won't get much comfort.

    Volcker starts off well, identifying the core problem of protecting institutions considered too big to fail.  "Public outrage over seemingly unfair treatment is palpable," he says.  It creates "moral hazard'' and it gives the biggest institutions "competitive advantage in their financing, in their size and in their ability to take and absorb risks."  He even invokes Adam Smith, the father of free market theory, as a supporter for keeping banks small.

      But then there is this jolt:

    The New York Times reports this morning that President Obama will announce a new push today for new limits on the size of banks and new prohibitions on their ability to conduct proprietary trading.

      The politics of this are obvious enough: after the Massachusetts disaster, which has dealt a major blow to the prospects for passing even a weak health care reform, Obama is reaching for something -- anything! -- to change the subject.   With the big bailed-out banks reporting hefty profits and ginormous bonuses this week, at the same time that they fight off regulation and a modest new tax, what better time than this to bash the banks.

      At this writing, we don't know any details about what Obama will propose.  They appear to echo ideas that Paul Volcker, the former Fed chairman, has been pushing in vain at least a year now.