On Wednesday, President Barack Obama made a proposal to make sweeping changes to America's financial regulatory system; changes which both he and financial pundits described as being in a similar scale as those made by President Roosevelt during the Great Depression. President Obama's proposal comes in the response to the financial crisis, which has ravaged the global economy and led to massive government spending and bailouts to keep the nation's economy afloat. During his announcement of the new proposals, Obama blamed the current recession on "a culture of irresponsibility" by bankers, regulators, politicians and consumers.
OTS Deemed the Weakest Link
One key move by the administration in the proposal is the elimination of a previously prominent banking regulator, the Office of Thrift Supervision (OTS), which was referred to as a "weak link" among bank regulators. Obama's desire to streamline regulatory agencies was a key part of his campaign platform and it looks like he's sticking to his plan with this portion of the legislation.
According to a June 17 article release by the Associated Press:
|The beleaguered OTS oversaw the IndyMac Bank and ., whose business insuring exotic securities blew up last fall, prompting a $182 billion federal bailout. OTS also oversaw other high-profile blowups like .,|
While the removal of such a well-known regulatory body may seem strange at first glance, it is clear that the Office of Thrift Supervision was not doing a very good job of monitoring risks for the companies that fell under its umbrella.
Overall, the president's proposal would appoint greater power and responsibility to the Federal Reserve, allowing the central bank to make decisions regarding the transparency and viability of large banks and institutions with greater autonomy. Obama also supported increasing regulation in nearly all areas of the industry, including mortgages, insurance companies, hedge funds and exotic derivatives. In addition, the proposal would see the creation of a new agency dedicated to the protection of consumers. The new consumer protection agency would primarily deal with issues surrounding mortgage and consumer credit abuses which many, including the president, see as one of the key factors behind the current financial crisis. (To learn more, see The Fuel That Fed The Subprime Meltdown.)
Although the proposal has the backing of many, Christopher Dodd, chairman of the Senate Banking Committee admitted that giving the Fed more regulatory power will have its detractors.
Many American's are unhappy with the huge bailouts the Federal Reserve has handed out to companies that were previously believed by citizens and politicians alike to be "too big to fail", namely the banking and insurance sectors along with the domestic automotive industry. Although many question the move to give the Fed greater regulatory authority of the nations large institutions, most admit that there are even fewer alternatives that make sense at this time.
Even with opposition from some market observers and political lobbying groups, many analysts (myself included) applaud President Obama for taking swift and decisive action against a financial industry that has thus far been given far more rope than should ever have been tolerated. (For more, read Liquidity And Toxicity: Will TARP Fix The Financial System?)