US Policy Disconnect

The Obama administration has shown itself to be disconnected from reality. The one bright light, Paul Volcker, chairman of Obama's Economic Recovery Advisory Board, is a lone prophet in the wilderness. Here's a bit from a post by Simon Johnson on The Baseline Scenario blog:

Volcker, legendary former chairman of the Federal Reserve Board with much more experience of Wall Street than any current policymaker, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933 – a highly regulated (and somewhat boring) set of banks to run the payments system, and a completely separate set of financial entities to help firms raise capital (and to trade securities).

This proposal is not just at odds with the regulatory reform legislation then (and now) working its way through Congress; Volcker is basically saying that what the administration has proposed and what Congress looks likely to enact in early 2010 is essentially — bunk.

Speaking to a group of senior finance executives, as reported in the Wall Street Journal on Monday, Volcker made his point even more forcefully. There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers). Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health.

Obama has shown his witless subservience to Wall Street by bringing close to him the architects of the catastrophe while keeping those who showed real insight into the crisis out in the wilderness of the "Economic Recovery Advisory Board". Sad.