The re-regulation of the American financial system

  • Share
  • Read Later

President Obama’s brief speech about the future of financial regulation this afternoon was pretty vague. But we’re been starting to see a clear pattern from this administration: Vague opening statement, such Tim Geithner’s much-criticized (not by me!) non-unveiling of his Financial Stability Plan two weeks, followed in pretty quick succession by details and action. (The details on the financial plan began coming out today.)

All of which means that the vague hints in Obama’s speech today will probably be converted pretty soon into legislation. Here’s his list of seven principles of regulatory reform:

First, financial institutions that pose serious risks, systemic risks, to our market should be subject to serious oversight by the government.  And here’s why.  When the Federal Reserve steps in as a lender of last resort, which it’s had to do repeatedly since this financial crisis began, it’s providing an insurance policy underwritten by the American taxpayer.  And taxpayers should be assured that the Fed thoroughly understands the institutions that it is effectively insuring and actively monitoring them to make sure that they’re not taking risks that will cost taxpayers in the long term.

Second, our regulatory system — and each of our major markets — must be strong enough to withstand both system-wide stress and the failure of one or more large institutions.  And that means modernizing and streamlining our regulatory structure, and monitoring both the scale and scope of risks that institutions can take.

Third, to rebuild trust in our markets, we must redouble our efforts to promote openness, transparency and plain language throughout our financial system.

Fourth, we need strong and uniform supervision of financial products marketed to investors and consumers.  And we should base this oversight not on abstract models created by the institutions themselves, but on actual data on how actual people make financial decisions.

Fifth, we must demand strict accountability, starting at the top.  Executives who violate the public trust must be held responsible.

Sixth, we must make sure our system of regulations covers appropriate institutions and markets, and is comprehensive and free of gaps, and prevents those being regulated from cherry-picking among competing regulators.

Finally, we must recognize that the challenges we face are not just American challenges, they are global challenges.  So as we work to set high regulatory standards here in the United States, we have to challenge other countries around the world to do the same.  That’s how we will stop financial crises from spilling across borders and prevent global crises of the sort that we now face.

One and six strike me as the really big deals here (and maybe seven, although I think the global stuff will take a lot longer to happen). Obama seems to be saying that big financial institutions of all kinds need some kind of hopped-up oversight, and that this oversight needs to be consistent across different kinds of institutions (that is, the current financial regulatory alphabet soup needs to become a bit less soupy). It’s all still, as noted, awfully vague—his big campaign speech on financial regulation almost a year ago was much more specific. But just you wait.