Financial Regulatory Reform by President Obama – 6/17/09
White Paper Full Text:
http://www.docstoc.com/docs/document-preview.aspx?doc_id=7400122
Obama’s Financial Regulatory Reform White Paper addresses 5 points -
1. Promote Robust Regulation of Financial Firms
2. Comprehensive Regulation of Financial Market
3. Protect Consumers from Financial Abuse
4. Provide government with tools to Manage Financial Crisis
5. International Regulation and Cooperations
Will these new proposed regulatory changes be beneficial for consumers and the financial industry as a whole, will they be able to prevent the next crisis?
What this White Paper recognized and proposed, was firstly that there are externalities in the financial market. The market, left on its own, though tend towards the efficient outcome, this outcome will possibly be skewed or unreachable, due to the existence of externalities. These proposal intended to create an environment where such inefficiencies can be minimized.
Of these give proposals, the majority of them seem in line to address some issues that arose out of the current financial crisis. While consumers credits should be protected from abuse, government should have more coherent tools in dealing with managing the crisis, international cooperation is important in providing greater coherence in a global environment, and that more financial products should be regulated, I have only to disagree that the regulations of a wider range of financial instruments should be the task of the Fed.
The Fed had traditionally been involved in the monetary policy of the economy, and is deemed independent from the government to separate monetary policy from the fiscal. If the Fed has to seek approval of the Treasury on Monetary policies, then this instrument becomes not independent of the government and such fundamental change in the agency structures should be heavily debated.
Another point is, this financial crisis was partly the responsibilities of the Fed following faulty regulations based on a flawed model, as Greenspan later admitted. If the Fed from now on administers the ‘correct’ policies based on a correct model, then everything is well. However, if the Fed ever, at some point, as it could, somehow believed that a faulty model is correct, and administered regulations based on that model, then given its wider reach, the next financial crisis could be greater and deeper.
Yes I do believe that hedge funds, derivatives, and other innovative financial instruments that were not regulated because such instruments were not in existence prior to the last regulatory overhaul, should now find themselves being checked by certain oversight agencies. We did see, that these parties played a role in the market, though in private hands. However, a new regulatory agency strictly devoted to the regulation of such funds and instruments should be established to oversee such varied instruments as what the Fed had traditionally oversaw. This also spreads out the regulatory risk that if the regulator has a faulty policy, it does not have the blanketing power to affect the whole economy.
What the White Paper proposed correctly, is that all parties, should be addressed to provide coherence to financial regulations and oversight. What it had lacked, was a debate on the independence of the Fed and the check and balances to regulators who were supposed to provide oversight, and where, if the Fed has a faulty model, then the economy could be in greater peril given his wider and deeper reach in the financial sector as proposed by the Paper.
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