Should firms be able to bet with your money?

The White House issued a statement on financial regulatory reform outlining two parts of their proposal. This one in particular seems like a very good idea:

1. Limit the Scope-The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

Megan McArdle describes it this way:

banks that have access to the discount window will not be able to trade for their own account. That means no prop [proprietary] trading desk. No owning hedge funds or private equity funds. No investments of any kind to make profits for your shareholders. Financial institutions can make profits by servicing clients, or they can make profits by investing for their own book. But they can't do both....

Indeed, if they pass this thing, they should probably call it the Hey Goldman Sachs! You're Not Going to Be So Profitable Any More Act of 2010.

She has reservations as to whether or not such a proposal is enforceable, but if it is then it seems like a positive step.

I still think resolution authority (that is, a way for failed firms to go out of business in an orderly manner) is the key to regulatory reform, but this proposal could compliment that authority.

If firms want to gamble, they should do so with private money. Preventing them from doing so with public money seems like sound policy.