President Obama detailed his broad plans for reforming the financial system today in Washington.
“The far-reaching effort would reorder the roles of some key agencies to try to tighten government supervision of the financial sector,” writes CNNMoney senior writer Jennifer Liberto.
The plan would also expand the roles of the Federal Reserve and the Treasury Department, per the article.
Obama’s speech, as released by the White House, said:
I am proposing that the Federal Reserve be granted new authority – and accountability – for regulating bank holding companies and other large firms that pose a risk to the entire economy in the event of failure. We will also raise the standards to which these kinds of firms are held. If you can pose a great risk, that means you have a great responsibility. We will require these firms to meet stronger capital and liquidity requirements so that they are more resilient and less likely to fail.
The president also wants to restrict the emergency lending power of the Federal Reserve in order to eliminate risk build-up.
Bloomberg reports, “President Barack Obama’s proposal on financial regulation… would force the central bank to get written approval from the Treasury before it extends emergency funding.”
Bloomberg says these reforms could be the biggest Fed overhaul in decades.
The 85-page proposal touches every corner of the financial system, though, notes Damian Paletta of The Wall Street Journal, “from tougher consumer-protection policies to stricter rules over exotic financial products, such as credit derivatives.”
The plan also would bring in new products and businesses under the new reform umbrella.
It was the lack of power to take over Lehman Brothers last September that sparked the whole financial crisis, speculates the BBC.
The BBC notes, “There will be more regulation of hedge funds, securitised [sic] debts and over-the-counter derivatives, all of which have been blamed for exacerbating the financial crisis.”
But will this proposal give the government and the Federal Reserve too much power?
A Zacks Investment Research article from iStockAnalyst.com says some investors are worried:
“If the Fed’s focus was expanded to also supervise large financial institutions considered ‘too big to fail’ (ala [sic] American International Group [AIG]) in order to prevent another financial meltdown,” says the article, “some assert that it might end up turning the Federal Reserve into an all-powerful entity that could in all eventuality slow down a major overhaul of banking and market regulations.”
But Taipan Publishing Group’s editorial director, Justice Litle, writes, “Because the big stakeholders in the current system (politicians, oligarchs, Wall Street fat cats and so on) have the most to lose, they are also the most resistant to change.”
That means that these stakeholders are bogging up a push forward through to “the other side,” says Justice.
The other side is a return to a beneficial environment of stability.
“We have to endure the unstable nature of change in order to reap the long-run benefits of that change,” writes Justice.
He continues, “This refusal to move forward is likely to make things get worse before they get better. As with the Lehman bankruptcy, it’s all about the difference between spotting a problem early and taking tough measures to fix it, versus trying to preserve the old order of things until the bitter end, when the moment of forced awareness arrives.”
There is no way to avoid moving forward, though, Justice says.
“It’s a matter of whether we do so willingly and intelligently, making the wisest decisions we can... or whether we stick our fingers in our ears and pretend the moment of forced awareness will never come. It will.”
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