Obama Ready to Fight Banks: How Will You be Affected?

• Tweet

• Tweet

Editor’s note: I thought I’d take a break from the normal schedule and give you a little politics and high finance reading for the weekend. Enjoy…

If the American public felt that the Obama administration had some special love for the banking sector, they might now have cause to reconsider. The president appears ready for a fight, which might be just what he gets from the big banks and their lobbyists. But can America’s struggling economy handle a drawn out “war” against those in high finance?

While the average American may find inspiration in a battle between the government and big banks, it could mean trouble for an economy that is still trying to find its legs after a near knockout blow.

At this point it is still unclear as to how exactly the banking industry, and the economy as a whole, will be affected by the Obama administration’s plans. President Obama has sketched some very broad strokes. He said this about proposed bank reform,

Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers.

And while he appears ready to do more, whether he can push his plans through congress and the screen of lobbyists in his path, remains to be seen.

As the markets on Wall Street continue trending lower, led largely by concerns over the Obama administration’s new plan, the US public, as well as the world, watches, waits, and wonders exactly how will the economy be affected by such a plan?

Short-term Effects of Proposed Bank Reforms

As we’ve already seen by the stock market’s steady decline since President Obama made his statements Thursday regarding his new plan, Wall Street will be affected by restrictions placed upon the banking sector. Whether these limits will just be a bump in the road for the financial sector, or a major obstacle that will derail the progress made by stocks over the last year, is yet to be determined. As clarifications are made as to whom Obama’s plan may effect and how, we will likely see continued volatility when it comes to financial stocks and the stock market as a whole.

If Obama’s restrictions result in larger banks such as JP Morgan, Citibank, Goldman Sachs, and the like, being broken up or having their trading and investing abilities inhibited, markets worldwide could also be taken along on a downward slide, affecting more than just the American economy. If such a scenario results in more bank failures and decreased confidence among investors that their money is safe within these institutions, we could see another financial crisis in the not too distant future.

And what if Obama takes on the banks and wins? It certainly doesn’t mean that America’s economy will suddenly produce 7 million new jobs for those that have been lost during the recession. It definitely doesn’t mean banks will suddenly stop their greedy habits in order to console and cajole their way back into their customers’ good graces. It doesn’t mean that by taxing the banks, the government will suddenly recoup all of the taxpayer money issued by TARP, or even that the mortgage and foreclosure issues, which were largely responsible for leading America down the path to financial disaster in the first place, will suddenly be resolved. These kinds of issues will likely linger well into the foreseeable future even with stronger bank regulations and more rigorous oversight.

There may well be a bright spot to Obama’s plan. That bright spot might reside however, at the end of a very long and very dark tunnel.

Long-term Picture After Obama Bank Reforms

If we try to take a more positive view as to what the Obama administration is trying to accomplish with this plan, it might require a broader, more long-term perspective.

It is doubtful that banks will give in easily to a plan that inhibits their ability to operate and profit as they have done in the recent past. However, over the next several years, if reforms persist, banks may eventually get back to basics. As memories of the recession fade and the banks that are left begin to loosen their purse strings to once again let credit flow, America’s economy may resume a more normal course. With consumers again confident that the banks are acting in their best interest, we may see an increase in spending which could reignite an economy based in large part upon consumer expenditures.

There is also the hope that with Obama playing the populist role and taking on big banks, he might gain the support and public confidence needed to make big changes in other sectors of the economy. Banking regulation could lead to greater reform in the mortgage sector, provide the president with stronger backing for job creation, and give him broader support to tackle immense economic issues such as social security and immigration reform.

If President Obama’s plan makes it through congress, by backing the banks into a corner, he may be able to reinvigorate an already struggling economy. On the other hand, through these actions, he may so damage what little progress has already been made on the economic road to recovery, that the nation’s economy will be pushed back into the depths we saw in 2008.

This is a guest post written by Mark Brown who writes for Money Compare, an Australian website offering people an easy way of savings account comparison that have a good return on investment.

References and More Reading:

Financial News. Harry Wilson. The Wall Street Journal Digital Network. Financial News: Bankers Count Cost Of Obama’s Bank Plan. [Online] January 22, 2010, 9:01 A.M. ET.

Reuters (New York) (Reporting by Emily Flitter, Angela Moon, Ryan Vlastelica, Nick Olivari, Charles Mikolaczak, Leah Schnurr, Clare Baldwin, Deborah Zebarenko and Dan Wilchins; Editing by Ted Kerr) Instant View: Obama proposes limits on bank risk-taking. [Online] Fri Jan 22, 2010 9:23am EST.

AM. Kim Landers. Obama Takes on Big Banks Again. [Online] Fri Jan 22, 2010 8:16 am.

Photo by jurvetson

Tweet

Did You Like This Article? Get free email updates! Sign up now and receive exclusive content and a FREE COPY of my eBook '31 Days to Improve Your Financial Life'. Enter your name and email address below: