US Financial Regulation Overhaul: Obama Walks Fine Line

By: CaraTan   Date: 18 June 2009

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CaraTan

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Cara Tan, editor

 

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Washington DC, USA, 18 June. Obama recently announced dramatic changes to US financial regulations in an attempt to avert future meltdowns. But the plan is not without its critics who fear it will introduce excessive regulation. Yet it still must include enough oversight to prevent future global crises.

Obama called for "a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."

The 88-page plan outlines measures the new administration will take, which includes expanded government oversight of financial institutions, more stringent regulation of financial markets and exotic financial instruments such as credit derivatives. It will also set up a new financial protection agency for consumers.

This consumer protection plan is designed to prevent excessively complicated or fraudulent financial instruments from damaging private investor portfolios.

The blueprint also gives the Federal Reserve new powers to regulate and monitor all financial intuitions whose demise could have ripple effects within the US financial system.

The government will also be able to close down any institutions other than banks, if it appeared that their failure would pull down others. This is primarily directed at insurance companies.

Overall, Obama's regulatory plan will "protect America's consumers and our economy from the devastating breakdown that we've witnessed in recent years," Obama said.

Martin Baily, chair of the Council of Economic Advisers for the Clinton Administration and senior fellow in economic studies at the Brookings Institution, isn't satisfied, "Is he proposing a system with smarter regulation, or just more regulation?"

Institutional Risk Analytics's Christopher Whalen doesn't see the plan adequately addressing the issues head-on, "The plan is not doing a whole lot of anything," says the former Wall Street investment banker. "The fundamental point is that we don't need new tools; we need political will to clean up the mess."

Overseas, the reaction was a bit more welcoming. Mei Xinyu, of China's Ministry of Commerce, commented, "Although Obama's new rules sent out a positive signal, it's impossible to rebuild the credibility of the U.S. financial system to 100%."

For obvious reasons, China is an important stakeholder in the global marketplace, and restoring their confidence in the fundamentals of the US system is critical to reviving the world's economies.

Nicolas Veron, a financial regulations specialist at Brussels think tank Bruegel, said after reading Obama's remarks that he expected the plan to be generally accepted by Europe.

He noted that the powers Obama is affording the Fed were, "very broad and very sweeping." Veron said that such moves might inspire Europe to enact similar measures.

Vladimir Gonzales, EconomyWatch.com

 


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