However, I am glad to see that Obama got the message. The Republicans better not sit back and think that this is a good sign for 2010. This wasn’t a repudiation of the Democrats so much as it was a message to the incumbents – Donkeys and Elephants. If the powers that be continue their fiscal recklessness and fail to address the structural issues that plague this country, they will be shown the door…exit, stage left.

I have two thoughts on the Volcker plan. First, this plan, or even Glass-Steagall had it remained on the books, would not have stopped this mess. It certainly would have mitigated the downside, but the bottom line for our economic situation comes back to debt. The “brains” on Wall Street and economics classrooms are ignoring the biggest lesson from the Great Depression and Japan. When a country assumes too much debt relative to incomes, it enters a debt deflation environment. This environment is plagued by debt liquidation, asset price deflation, lower economic growth, and volatile markets. Just read Irving Fisher’s work from 1933 “The Debt-Deflation Theory of Great Depressions.” Or, you may want to read Ken Rogoff’s new book, “This Time Is Different.” Both works show how mismanaging debt leads to economic chaos. So even if we had separated the deposit banks from the investment banks (and their proprietary trading desks), we were doomed to experience this debt deflation. Even worse, we are no where near through this mess. Until debt levels return to healthier ratios, we will not be done…unless this time it is different and the laws of economic prudence don’t apply to us because we created the Big Mac and the Snuggly.

Second, Volcker is bringing back a portion of Glass-Steagall and adding a bit of breaking up the big banks. I hate excessive regulation as it stymies economic growth, but Glass-Steagall was common sense. Keep the banks that take Ma and Pa’s money and receives government backstops separate from the banks that operate as hedge funds by making bets on the markets. We, as taxpayers, should not backstop a bank that is investing in various markets for profit like a hedge fund or mutual fund. We shouldn’t pay because they made a big bet on GE stock, which didn’t work out. We also should not have banks taking our deposits from the sweat of our brows to invest in the market. Part of the blame should fall on us since we used Citi and BofA for our deposits. We should use local banks that act like banks. So putting the wall between these two types of banks is critical.

Breaking the big banks up makes no sense. If we separate depository institutions from the risk taking investment banks, then size doesn’t matter (probably the only situation it doesn’t :) ). A depository bank can get as big as it wants so long as the bank is not taking the massive risks associated with investment banks. Investment banks can get as big as they want so long as when their decisions turn south that the bank cannot come to the Federal Reserve to get bailed out with our money.

Overall, I feel a trend is developing where the American voter is finally forcing politicians to be fiscally prudent. Those who aren’t will suffer the wrath of the voter, especially if this mess hangs with us for a few years, which I suspect will happen.