Overdue Overhaul

By Jillian Olinger, Graduate Research Associate at the Kirwan Institute

On June 17, President Obama laid out a plan for financial reform to protect against future financial meltdowns of the kind we have been experiencing for the past two years. The President criticized the lack of oversight and regulation, as well as the “culture of irresponsibility” that took root at both Wall Street and Main Street. In response, the President’s plan balances both demand-focused proposals, in the form of a centralized Consumer Protection Agency, with supply-focused proposals, in the form of systemic regulations. The plan recognizes that today’s global economy calls for a restructured system of oversight that can keep pace with the speed and scope of 21st century financial systems.

For consumers, the plan would not only create a new federal agency specifically to protect consumer interests related to financial products, but also mandates that financial products are transparent and comprehensible to consumers, without hidden costs. This oversight, coupled with the systemic regulations, ideally will align the products offered by the institutions with consumer needs. As Gail Hillebrand of Consumers Union noted, “Strong fair rules will reward competition to serve the customer, instead of ‘gotcha’ banking.” (ref#1)

For systemic regulations, among other things, the plan calls for Federal Reserve oversight of US institutions considered “too big to fail” to protect against future systemic failures. The plan also would create a new council of regulators to monitor risk across the system, including responsibility for increased oversight on the global financial institutions considered “too big to fail”. In addition, the plan requires that institutions retain a greater proportion of assets, thereby forcing institutions to retain some risk. For example, institutions that package mortgage-backed securities would be required to retain at least 5% of mortgages to encourage more responsible lending. (ref #2)

The proposal addresses both the failures of risk management and responsibility exhibited by the financial industry, and the failure of consumer protection. In an interview on News Hour, Secretary of Treasury Timothy Geithner pointed out that “In the financial sector, the financial markets require well-designed regulation. We did not have well-designed regulation…So our job is to get those better. And it’s not going to require more of them; it’s just going to require better design, more effectively applied, more broadly applied to contain risk, protect consumers.” (ref #3)

That’s what this plan promises: a responsible, comprehensive system of checks and balances that meet the needs of a 21st c. global financial system. Whether this promise is delivered remains to be seen.

[1] Paul Solman. “How Will Regulatory Reforms Affect Consumers?” The Business Desk with Paul Solman. Online Newshour. June 18, 2009. Available at http://www.pbs.org/newshour/businessdesk/2009/06/how-will-the-regulatory-reform.html
[2] Carolyn O’Hara. “Five Things to Know About the Financial Regulatory Overhaul.” Online Newshour. June 17, 2009. Available at http://www.pbs.org/newshour/updates/business/june09/reghighlights_06-17.html
[3] Transcript. “Geithner Defends Plan for Regulatory Overhaul.” June 18, 2009. Available at http://www.pbs.org/newshour/bb/business/jan-june09/geithner_06-18.html