Having read through the draft of President Obama’s financial regulatory proposal, my initial reaction is largely positive. He sets the right tone and says all of the right things. However, the devil is in the details and we will need to see how these firm up as these ideas become law. In my view, there are a number of likely turf fights which will result from this proposal which will present a challenge. Moreover, the changes do give the executive branch via the Treasury and the Federal Reserve more power, and it is unclear both whether this is wise and whether it will be acceptable to members of Congress.
The President begins his proposal by acknowledging this severe crisis, the worst since the Great Depression, has been a severe blow to ordinary Americans and their access to credit for homes, cars, education, and businesses. He then states that the ultimate cause lies decades in the past due to complacency stemming from the apparent resilience of the U.S. economy. To be sure, crises did occur, but they never penetrated Fortress America’s defenses. I see this as a veiled rebuke of the Greenspan Era (see my post “The US Economy 2008” for a similar take on how the damage to the U.S. economy made this crisis different). He also decries a lack of transparency and the looting of American consumers before summing up that we must act now.
The President then makes five overarching points:
- Reforms must promote robust oversight and regulation. I see these points as an explicit separation of the two tenets of the de-regulation movement – oversight and regulation – into separate issues. I anticipate Obama will move to greater oversight, but still allow de-regulation to ensue largely as it had done before the crisis.
- Reforms must remove the balkanization of regulatory agencies. This is where problems lie because the concentration of power lies with the Treasury and the Federal Reserve. The executive branch already has too much power in the U.S. Government and the Federal Reserve has fallen prey to cognitive regulatory capture, making it an unlikely choice for systemic risk regulator (which I have dubbed SiRR).
- Reforms must protect consumers better. While this is a very necessary inclusion, let’s see how robust the actual measures are.
- Reforms must address operational issues that tie regulators hands. This point is clearly inserted to absolve Paulson, Bernanke and Geithner of any responsibility for the collapse of Lehman Brothers and the resulting panic this collapse caused. Do not be fooled by this point, it serves no other purpose.
- Reforms must be international. Yes. This is a must. We cannot stop at domestic reforms because much of the problem has been the globalized nature of finance and financial institutions. Companies like Deutsche Bank, HSBC, Citigroup, UBS, and Santander – to name a few – all have more significant operations outside of their country of domicile than domestically. I view this point as a call to other countries to institute similar reforms and to ready themselves for international cooperation in regulating finance going forward.
On the whole, this is a good effort. However, this is just a blueprint to set the tone for eventual action – much as Geithner’s bailout plan for a plan was merely a blueprint. In my view, this is positive because it means we can still debate many of these issues and affect change before legislation is enacted in order to ensure a robust yet market-oriented approach which limits concentration of power in one entity or branch of government.
Below is a copy of the President’s prepared remarks.
Update: you will notice that point 2 gives new powers to the Treasury and the Fed, while point 4 absolves the leaders of those institutions of blame for the worst unforced error during the crisis. Clearly, point 4 is necessary if you have point 2.