How To Fix the Financial Problem

Here is Andy Xie's take on the situation. Xie was previously with Morgan Stanley and covers Asia. His article is mostly focused on Japan and its woes but it ends with the following which is highly relevant to the situation in the US:

US President Barack Obama has just announced a proposal to limit proprietary trading on Wall Street. This is his first major step to address the root cause of the crisis.

The crisis happened because financial professionals had incentives to bet other people's money in a game they could not lose. With so many getting in on the act, the liquidity they threw into the trades made them effective, turning bankers into heroes, but only for a while.

The crisis showed that their behavior was indeed rational: while the losses to shareholders and taxpayers surpassed all the accounting profits that Wall Street reported during the bubble, those who made the trades are still rich, because they paid themselves bonuses in cash, not derivatives.

Obama has not been well-advised. His so-called accomplishment — stabilizing the financial system — comes from throwing trillions of taxpayers' dollars at financial firms. He has behaved like a Wall Street trader: spending other people's money with no thought of consequences. Anyone can do that. Hopefully Obama has fundamentally changed his approach.

Reform, not stimulus, is the solution. Only by limiting financial speculation can the foundations be laid for a healthy recovery, and to prevent another crisis.

There are a lot of knowledgeable people shouting at Obama to stop playing footsie with Wall Street and get serious about fixing the financial problems. Up until now Obama has turned a deaf ear. He has only 32 month to keep playing the dummy before he is voted out of office.