Barack Obama and the banks: At last, action

At last, after the biggest crash since 1929, here comes the political response to match. Barack Obama has never been much of a Roosevelt, but his language yesterday as he unveiled plans to tame Wall Street was hard: “Never again will the American taxpayer be held hostage by banks that are too big to fail.” And referring to those politicians, lobbyists and bankers who would block the reform process, he vowed: “If these folks want a fight, it’s a fight I’m ready to have.” This is not quite Roosevelt’s vow to throw the money-changers out of the temple, but it is strong stuff nonetheless. No wonder stock markets swooned on the announcement.

And what kind of fight does the president propose? It takes two forms. First, from now on big is bad. “No more consolidation,” he said yesterday – and so any giant bank that tries to buy a rival will be beaten about the head by the competition authorities. Second, regardless of size banks are going to have their wings clipped – deposit-taking institutions will be banned from getting into hedge funds or private equity; nor will they even be allowed to trade in their own interest. From now on, banks are meant to be safe.

These ideas come from Reagan-era central banker Paul Volcker (indeed, the White House calls them the “Volcker rule”), who has been one of the leaders in the bank reform debate. As such they represent a big slap for the treasury secretary, Tim Geithner (who hovered on the sidelines for the announcement and had a face like thunder throughout), and for the current Federal Reserve head, Ben Bernanke. These are the men who have counselled caution and regulatory retreat in dealing with the banks; and their sidelining is all to the good. President Obama also delivered an implicit rebuff to Larry Summers, who – as a treasury wonk under Bill Clinton – did so much to dismantle Wall Street regu lation, with the disastrous results we all know.

There is a big question about what took the president so long. Barack Obama’s attack on the banks came 15 months after the collapse of Lehman Brothers, a year after the presidential inauguration, two days after his party lost the previously solid Massachusetts senate seat and on the very morning that Goldman Sachs announced it would pay $16bn in bonuses to staff – and described that as restrained. He could have acted a lot sooner; he should certainly go further. Instead, he got bogged down in a long, drawn-out battle over healthcare reform, and got distracted from the rest of his in-tray.

Still, say this for the president: when other governments kept harping on about how any serious reform could only be done internationally, he has just gone ahead and done it. No G20 agreements, no OECD working party, just political will. Gordon Brown, over to you.