President's plan for reform
This new foundation also requires strong, vibrant financial markets, operating under transparent, fairly-administered rules of the road that protect America’s consumers and our economy from the devastating breakdown we’ve witnessed in recent years.
It is an indisputable fact that one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis – the Great Depression – was overwhelmed by the speed, scope, and sophistication of a 21st century global economy. In recent years, financial innovators, seeking an edge in the marketplace, produced a variety of new and complex financial instruments. These products, such as asset backed securities, were designed to spread risk but ended up concentrating it. Loans were sold to banks, banks packaged these loans into securities, and investors bought these securities often with little insight into the risks to which they were exposed. It was easy money. But these schemes were built on a pile of sand. And as the appetite for these products grew, lenders lowered standards to attract new borrowers. Many Americans bought homes and borrowed money without being adequately informed of the terms, and often without accepting their responsibilities.
- Geithner, Summers Op-Ed: A New Financial Foundation
- Remarks by President Obama
- Executive Summary
- Full Report
- The 2008 Financial Report of the US Government
- Requiring Strong Supervision And Appropriate Regulation Of All Financial Firms
- Strengthening Regulation Of Core Markets And Market Infrastructure
- Strengthening Consumer Protection
- Providing The Government With Tools To Effectively Manage Failing Institutions
- Improving International Regulatory Standards And Cooperation
- On the Road to Regulation, New York Times, published June 27, 2009
"The Obama administration’s financial regulatory reform proposal has had an inauspicious start. First, lawmakers from both parties gave it a lukewarm reception in the Senate Banking Committee when it was released nearly two weeks ago. The House Financial Services committee has postponed its hearings until after the July recess.
Then, on Thursday, Ben Bernanke, the Federal Reserve chairman, was grilled by the House oversight committee on the Fed’s role in the troubled merger of Merrill Lynch and Bank of America.
Mr. Bernanke denied anything improper — including accusations that the Fed angled to delay public disclosure of Merrill’s losses and to keep other regulators in the dark about post-merger bailout plans for BofA. Still, lawmakers pledged to dig deeper, and that will make it harder for the administration to push one of its most controversial reform ideas: to make the Fed the main regulator of systemwide risk, broadly expanding its powers.
That could be a good thing. There are other aspects of the plan that could be accomplished first, like new regulation of derivatives and creation of a consumer financial-products safety commission."
The causes of the crisis have not been studied systematically--there is no counterpart to the 9/11 Commission's exhaustive study of the 9/11 terrorist attacks--and they are not obvious though treated as such in the report. The report asserts without evidence or references that the near collapse of the banking industry last September was due to a combination of folly on the part of bankers (in part reflected in their compensation practices), credit-rating agencies, and consumers (gulled into taking on debt, particularly mortgage debt, that they could not afford), and defects in the regulatory structure. There is no mention of errors of monetary policy by the Federal Reserve that pushed interest rates down too far in the early part of this decade. Because houses are bought mainly with debt (for example, an 80 percent mortgage), a reduction in interest rates reduces the cost of owning a house and can and did cause a housing bubble, which when it burst took down along with the homeowners the banks and related institutions that had financed the bubble. The report also fails to mention the deregulation movement in banking, which enabled banks to make much riskier loans than in the old days when regulation discouraged competition in banking. And there is no mention of lax enforcement of existing regulations or the complacency of the economics profession, including its representatives in government, though regulators' failure to spot the evolving crisis is mentioned. There is exaggerated emphasis on mistakes by the banks themselves, and no recognition that a regime of very low interest rates and very light regulation encourages perfectly rational, intelligent bankers to take risks that can, albeit with low probability, precipitate a global financial crisis.
Many experts, even at the Federal Reserve, think that the country should not allow banks to become too big to fail. Some of them suggest specific economic disincentives to prevent growing too big and requirements that would break them up before reaching that point.
Yet the Obama plan accepts the notion of “too big to fail” — in the plan those institutions are labeled “Tier 1 Financial Holding Companies” — and proposes to regulate them more “robustly.” The idea of creating either market incentives or regulation that would effectively make banking safe and boring — and push risk-taking to institutions that are not too big to fail — isn’t even broached.