The President took on Wall Street Thursday. Stocks plummeted, consumer activists cheered. Now we are talking.

Obama's throwdown comes hard on the heels of the special election in Massachusetts in which public outrage over the bank bailout and the state of the staggering economy played a major role. As we have already reported, Republican Scott Brown [3] seized the Democratic stronghold by billing himself as a man of the people and using public dismay with the Wall Street bailout to his advantage on the campaign trail. On Thursday, Obama showed he got the message.

For the first time, the President's narrative directly blamed Wall Street for the crisis and proposed a major structural reform to business-as-usual. After freeing former Federal Reserve [4] Chairman Paul Volcker [5] from the closet he had been stuffed in at the Treasury Department [6], Obama brought him out to announce new measures long advocated by Volcker.

First, Obama wants to pass the "Volcker Rule," to wall off proprietary trading from commercial banking. "If financial firms want to trade for profit, that's something they're free to do… But these firms should not be allowed to run hedge funds and private equities funds while running a bank backed by the American people," said Obama. "And we cannot accept a system in which shareholders make money on these operations if a bank wins, but taxpayers foot the bill if a bank loses."

This move was applauded by public interest groups. "Ten years ago, the financial lobby convinced our leaders that the country's most important banks should be allowed to operate like hedge funds. That deregulatory gamble cost us trillions in household wealth and millions of jobs. President Obama's proposals greatly improve the reform package needed to prevent another crisis," said Heather McGee of [ http://www.demos.org/ Demos], a non-partisan public policy research and advocacy organization based in New York City.

If passed by Congress, the measure should impact bank holding companies that also do investment banking, including Goldman Sachs [7], Morgan Stanley [8], JPMorgan Chase [9] and Bank of America [10]. Some of these institutions might be forced to give up their status as FDIC [11]-backed bank holding companies, while others might have to spin off their trading arms.

Obama also sounded the right note about the conflict of interest problems with proprietary trading, but did not recommend a specific remedy. Goldman Sachs Chairman and CEO Lloyd Blankfein [12], appearing before the Financial Crisis Inquiry Commission [13] last week, defended his firm's practice of selling toxic mortgages to "sophisticated clients," while betting against those clients on the market. Blankfein argued that because the firm was not a "fiduciary" or trustee, it had the right to mislead its clients about the firm's own assessment of the worth of the securities it sold. Under that logic, store owners should be applauded for selling toxic candy to kids.

Finally, the President said he would place limits on the size of banks, but would leave the details on how best to do so to regulators, (hopefully not the same regulators at the Fed and the Treasury [14] who think it is a bad idea). The President's press team says that he is interested in placing broader limits on the "excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits." This could be a fruitful approach. Simon Johnson, former IMF economist, says that no firm should have liabilities that exceed 2 percent of annual GDP. Right now, Bank of America [10]'s liabilities exceed 14 percent of GDP. Johnson's 2 percent cap would force the downsizing of current institutions, something Obama indicated he was reluctant to do.

Obama pledged: "Never again will the American taxpayer be held hostage by a bank that is too big to fail." If he is serious about this pledge, he must go a step further and break up the behemoth banks that currently control 60 percent of all deposits and have undue influence on the political system.

Obama's new emphasis on stronger Wall Street reforms was a hopeful sign that Democrats might learn the lessons of the Massachusetts race and get serious about preventing the next meltdown. Obama is also upping the ante on House and the Senate leaders who have failed to advance either of these important reforms and pushing aside top economic advisers Larry Summers [15] and [[Timothy F. Geithner|Tim Geithner] who have advanced a weaker set of reforms and a cozier relationship with Wall Street.

Will he go to the wall? At least the President is striking a new note, and the right one. "An army of banking industry lobbyists have descended on Capitol Hill. If these folks want a fight, it's a fight I am ready to have," he said.