STAFF NEWS & ANALYSIS
President Obama's Plan for Financial Reforms Has Many Flaws
By - June 19, 2009

The key parts call for:

– Creating the Consumer Financial Protection Agency, a watchdog agency that would force lenders to clearly explain their products.

– Closing numerous loopholes that allowed huge parts of the financial markets to go unregulated.

– Launching a Treasury Department council to oversee new, dangerous economic risks.

– Giving the Federal Reserve sweeping new powers to regulate and dismantle faltering "too-big-to-fail" companies that endanger entire markets.

Legislators agreed the overhaul is desperately needed, but observers found plenty of flaws. "I would describe it as two steps forward, 1-1/2 steps back," said Prof. Lawrence Wright of the NYU Stern School of Business. He agreed an overall risk regulator is needed, but he wondered if expanding the role of the Fed was smart, considering all it has to do. Some Democrats had the same concern and already were starting to peck at the plan. "There's not a lot of confidence in the Fed at this point, and I'm stating the obvious," said Connecticut Sen. Chris Dodd, the Democratic chairman of the Banking Committee. Dodd and others favored giving the job of regulating systemic risks to some sort of council. Obama's plan has such a group, but it would not have the Fed's authority. "Everybody, left and right, is completely terrified of being seen as wanting to grow government," said a senior legislative aide. – NY Daily News

Dominant Social Theme: Provide us, please, with the norm.

Free-Market Analysis: We've advanced the theory that the monetary elite is willing to sacrifice the Federal Reserve in order to create a more global central bank. However, we've also read reports recently that the Obama administration drew the line when it came to reducing Federal Reserve power. Those creating a brave new world of American financial regulation were in fact determined to expand it. All right, then, too bad. Maybe the Fed is not going away. Or not for a while, anyway.

It seems to have been very important to the administration that the Fed receive more powers. Treasury Secretary Timothy Geithner, for instance, reportedly nixed several plans that would have created a council of regulators to administer some of the powers that the Fed is slated to receive. At one point, Geithner is said to have used a string of profanities to indicate that the administration was not willing to compromise — that the Fed would expand significantly. (Was this, in retrospect, the point of the whole exercise?) What is so striking about giving the Fed more power is that the Fed's reputation has never been lower, or not in years.

By proposing expansive Fed powers, the Obama administration is opening up the entire regulatory proposal to bipartisan attack. There is broad support for a thorough Federal Reserve audit and the bank has borne the brunt of a good deal of criticism in the past months. Additionally, the plan to give the Federal Reserve sweeping new powers to regulate "too-big-to-fail" companies will likely create a hierarchy of corporations in the United States, freezing large financial entities in the amber of protective regulation. There are immense advantages to be derived from the too-big-to-fail mantle. But the most acute result will be the de facto enshrinement of Wall Street as a national good. The line between the public and private sector is to be more aggressively blurred than ever before.

Wall Street was only implicitly the government's dedicated financial engine prior to these regulatory changes. But now, with the Federal Reserve in charge, and itself a private entity, the lines between what is public and private in the United States is hopelessly blurred. This is indeed a new era. Essentially, the nation's largest banks and capital formation agencies, will gain the backing of the federal government, which in turn will closely regulate functions, compensation and business lines. The next time Wall Street blows up, it takes the federal government with it.

The critical issue when it comes to this new package of regulations is whether the Federal Reserve really comes away with new powers. The invasiveness of these powers would surely be immense – if not immediately, then over time. Private trading firms could be commanded to produce regular reports on trading so that Fed officials can monitor what is risky and what is not. Almost every single financial decision of note could eventually be subject to scrutiny.

Under these proposals, unelected central bankers will basically control the pace, kind and appropriateness of capital formation. (No wonder the administration wants to move quickly.) One can only imagine the ramifications of a quasi-governmental body determining on a case-by-case basis what constitutes a risky trade or market position. Imagine the additional legal and legislative ramifications. A whole new body of law may be required to adjudicate the inevitable altercations.

After Thoughts

It is really quite a concept. Of course, it won't prevent another boom or bust – as these are caused by central banks over-printing of money. How is it that an entity (the American central bank) responsible for many of the torturous economic fluctuations of the 20th and 21st century can receive such stunning new powers. This is not so much a logical outcome as a kind of predetermined shadow-puppetry.

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