03/23/2010 05:12 am ET | Updated May 25, 2011

Obama Bank Proposal a Beginning

The Obama proposal to rein in banks is overdue. That it required the wake up call in Massachusetts Tuesday is unfortunate. It again leaves the Obama team appearing to be behind, not ahead, of the issues. Many well-informed and well-intentioned analysts, not just Paul Volcker, have been advocating a similar paring down of bank activities- a modern Glass Steagall - for a long time. We should all eagerly await the details of how it will work. But at first glance, the proposals appear to be well thought out. Savers' deposits, insured by the federal government, cannot be put on the line to help individual traders make a personal fortune.

But at the risk of being a party pooper, let me loudly state that this is not all there is to do. High on the priority list should be a new set of capital requirements for the shadow banks. These may yet include Goldman Sachs and Morgan Stanley, who may decide to give up their bank holding company status to avoid the new restrictions. (If they don't have a deposit-taking subsidiary, they may not have to.) I would like to have heard some emphasis of this again as part of today's announcement.

The shadow banks, it should be clear, can still do a lot of damage to the financial system. A new set of capital requirements is needed at a fairly high level to restrain absurd excesses by investment banks and other entities that escape bank regulation.

These can be adjusted in different circumstances, but I'd prefer permanently substantial ones.

On this issue, the question remains as to who will be in charge of such matters. The current proposed legislation would leave it to the Fed, as systemic risk regulator, whose job would be to set new requirements. But the Fed has done a terrible job of regulation in recent years. Terrible is not too strong a word to use, as many now realize. It has been subject to capture by the financial community or to flights of ideological fancy -- Greenspan's but to a lesser degree Bernake's, who at least has shown the ability to adjust quickly. We need a body that can be trusted and that itself is subject to oversight.

Regulation of derivatives is still inadequate in the Barney Frank House bill as well. Nothing substantive is done about the private credit ratings agencies. Compensation is still untouched in any real sense.

The Obama administration has not been able to put forward a cohesive, intellectually sound explanation of the sources of the crisis. It has addressed only the variety of failures that all of us are aware of. Without that vision, the efforts have so far had little weight. The administration was just one of many throwing its hat into the ring. Then it didn't fight for what ideas it had.

The lack of support for a consumer protection agency was one result. Thankfully, Obama has also added that to the revitalized agenda, as well a tax on the banks. If the current Obama economic advisers are not enthusiastic about a revitalized set of financial regulation proposals, the president should get a new team.

Something is going on. But this is just a beginning. It's the first good beginning in a while. One old liberal lion of Wall Street had another terrific suggestion over lunch recently, one I've also thought about: What about an excess profits tax on financial companies? Surely, they didn't deserve all that 2009 income. We've placed it on the oil companies when oil prices take off momentarily. It is simpler and more comprehensive than current tax proposals. We are fighting a war, we have a failing healthcare system, we have a decrepit infrastructure. It is time for an excess profits tax on Wall Street, not only as a matter of fairness or to reorient incentives, but also to help a nation in serious straits.

This post originally appeared on New Deal 2.0