Wednesday, September 16, 2009

US financial reforms far removed from political reality

Business Times - 17 Sep 2009

US financial reforms far removed from political reality


EXACTLY a year after the collapse of Lehman Brothers and the ensuing financial crisis, US President Barack Obama has urged Congress to move on stalled regulatory reforms of the nation's financial system. Mr Obama, who was speaking to Wall Street business leaders, also stressed that the 'the old ways that led to this crisis cannot stand', stating 'the need for change and change now'.

'We will not go back to the days of reckless behaviour and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,' the president insisted, as he drew attention to the way American taxpayers had 'shouldered the burden of the bailout' and were 'still bearing the burden of the fallout - in lost jobs, lost homes, and lost opportunities'.

Indeed, Main Street has paid a very high price by helping to save Wall Street, so perhaps the time has come for Wall Street to reciprocate by changing its behaviour and ensuring that financial meltdowns would not occur in the future.

Mr Obama seemed to be touting the need for three major steps towards reforming the way that the financial system was being monitored and regulated.

First, by creating an agency to protect individuals against those who sell risky financial products.

Second, by establishing more effective regulation over securities firms and banks.

And third, by providing the necessary legislative power to make sure that another financial crisis never happens again, that it can be halted before it destroys the entire financial system and the economy.

It all sounded great, especially when Mr Obama delivered it. But the president and his top economic aides have been promoting these kind of changes in the way Wall Street does business and the way the government regulates it since the day they arrived in Washington early this year. Among other things, Obama administration officials have called for beefing up the Federal Reserve Board's oversight of the entire banking system as well as for the creation of a financial consumer protection agency to oversee risky financial products.

Hence, the wide gap between the vision of reform outlined by Mr Obama and the political reality in Washington, which in turn reflects the power of Wall Street's interests.

Indeed, there is probably going to be a long debate and a brutal political fight over whether the Fed should be made even more powerful in preventing potential financial crises. Expect enormous opposition on Capitol Hill to derail the proposal.

Unfortunately, with healthcare reform and climate change legislation topping the agenda, the idea of creating a Consumer Financial Protection Agency and other proposed reforms relating to the financial sector, such as derivatives regulation, have been placed on the legislative backburner.

And there is probably very little chance that there will be real reforms affecting Wall Street in the next year or so.

Indeed, even the most optimistic observers in Washington do not expect to see more than a few minor alterations here and there. But they all seem to agree on one issue: Even these cosmetic forms of legislation will only be approved by Congress under one condition - that the lobbyists for the powerful financial industry, a source of money to lawmakers from the two major political parties, accept that such reforms are not a threat to their interests.

Thus, nothing dramatic has changed in the structural foundations of the financial system since the collapse of Lehman Brothers. Too-big-to-fail financial institutions continue to exert their leverage and many investors are once again taking the same reckless risks that had led to the current crisis.

It was during the height of the financial crisis that Washington could count on public pressure to fix the financial system. But this window of opportunity to enact reforms has started to close as Americans conclude that things are getting better in Wall Street.

That puts President Obama in a political bind: The more he and Fed chairman Ben Bernanke continue to insist that their policies are reviving the financial system, the less they have to count on public and congressional support for accelerating reforms.

That might explain why Mr Obama sounded during his address on Monday as though he was pleading with the investors and bankers in Wall Street to take immediate voluntary action in the direction of self-regulation, cutting their executive salary packages and bonuses, and protecting the interests of consumers by renegotiating mortgage terms.

Now, that can only be described as a sign of irrational exuberance on Mr Obama's part.

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