Current US Economic Policy
President Obama Calls for New Financial Regulatory System
By Merle David Kellerhals Jr.
Staff Writer
September 14, 2009
Washington — President Obama called on the nation’s financial industry September 14 to work with him and Congress in crafting a new regulatory system to prevent a repeat of the current crisis, which is the worst since the Great Depression of the 1930s.
In a speech in New York, Obama said there is growing stability appearing in the U.S. economy and it is beginning to return to normal as a result of interventions in the marketplace by the federal government. But he warned officials from the financial sector that “normalcy cannot lead to complacency.”
“That’s why we need strong rules of the road to guard against the kind of systemic risks that we’ve seen,” Obama said. He chose to address the financial sector from Wall Street about the risks of allowing the nation to again conduct business without regard for the consequences of a marketplace under-regulated and with inadequate oversight from the federal government.
His comments come one year after the largest bankruptcy in U.S. history, when the investment firm Lehman Brothers collapsed. That bankruptcy set off a string of managed mergers to prevent further failures and to prevent the possible collapse of the U.S. financial system.
“We will not go back to the days of reckless behavior 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,” he said. “Those on Wall Street cannot resume taking risks without regard for consequences and expect that next time American taxpayers will be there to break their fall.”
Obama said Congress and the federal government have a responsibility to write and enforce regulations and laws to protect consumers of financial products, taxpayers and the national economy. He added that the new rules must not stifle innovation and enterprise. Legislation to enhance security in the U.S. financial system is before Congress and Obama wants Congress to move ahead with the legislation.
Financial reform and international regulation will be key issues at the Group of 20 Summit of advanced and fast growing economies in Pittsburgh September 24–25. Obama sought to assure world leaders that the United States is seeking to prevent recklessness and weaknesses in its financial sector. “The United States is leading a coordinated response to promote recovery and to restore prosperity among both the world’s largest economies and the world’s fastest growing economies,” he said.
Several European leaders have signaled that they want much stronger financial regulation, including requiring commercial banks to hold larger capital reserves and to limit corporate bonuses and compensation as a means of preventing excessive risk taking.
“This work will continue next week in Pittsburgh when I convene the G20, which has proven to be an effective forum for coordinating policies among key developed and emerging economies and one that I see taking on an important role in the future,” Obama said.
Obama is calling for a new Consumer Financial Protection Agency to oversee home mortgages, credit cards and other financial products that have the most impact on consumers. He also wants to put the Federal Reserve, the nation’s central bank, in charge of overseeing the largest, most interconnected firms that pose the greatest systemic risk to the U.S. economy.
“We’ll create an oversight council to bring together regulators from across markets to share information, to identify gaps in regulation, and to tackle issues that don’t fit neatly into an organizational chart,” Obama said. “We’ll require these financial firms to meet stronger capital and liquidity requirements and observe greater constraints on their risky behavior.”
In addition, the president has proposed the creation of a resolution authority that would manage the failure of large, interconnected companies previously considered “too big to fail.” The proposal is not designed for commercial banks because a federal agency already exists for that purpose, he said. This proposal is for companies such as Lehman Brothers and insurance giant American International Group and other large companies that currently do not fall under the authority of a federal agency.
Obama said Congress needs to close loopholes where exotic financial instruments such as hedge funds can operate outside of the regulatory system entirely. “We’ve seen the development of financial instruments — like derivatives and credit default swaps — without anyone examining the risks, or regulating all of the players,” the president said.