Banking on the power of new financial rules

The Obama administration rolled out its proposed new regulations for the financial industry this week — proposals that are sure to stir robust debate in Congress. The debate is already under way on the opinion pages of some of the nation’s leading newspapers.

While not all of President Barack Obama’s proposal are likely to survive in their current form, they deserve fair consideration, even by Republicans, not just knee-jerk opposition.

Some of the proposals certainly make sense, at least conceptually, in light of the current financial crisis.

It’s hard to argue, for instance, that the government should have no authority to regulate hedge funds and those complicated financial instruments known as derivatives. Both played significant roles in the current financial problems, and the president’s plan would provide some government oversight of both.

Additionally, in an age when large corporations have been awarding top executives massive bonuses and pay raises, even as the companies they ran have been stumbling toward bankruptcy, rules that push corporations to give their shareholders greater say over executive pay make sense.

So do regulations requiring financial institutions to hold more capital in relation to their debt. U.S. taxpayers have bailed out a number of institutions over the past nine months in large part because the firms didn’t do that.

Changing the rules so that mortgage companies hold a percentage of all the loans they generate may make it somewhat more difficult for homebuyers to obtain loans. But it will also provide an incentive for mortgage firms to be more cautious, to not be so free with zero-equity loans, which they would sell to someone else as soon as the ink was dry on the contracts.

However, there are some understandable concerns about parts of Obama’s plan.

For one thing, it would give the Federal Reserve Bank and the Treasury Department broad new power to become involved with private financial institutions if federal authorities believe the institutions are teetering toward failure. The idea is to prevent the sort of near failures that have cost taxpayers billions of dollars in bailout money for the likes of AIG and Citigroup. But it also raises the possibility of excessive and unnecessary government meddling in healthy financial institutions, not to mention potential political pressure from members of Congress to interfere with specific companies.

Then there is the new consumer agency that would be created by the president’s plan, an entity that would have limited powers in dealing with credit cards, savings accounts, mortgages and annuities. Helping consumers navigate the complicated waters of such financial instruments is certainly a good thing. But creating a vast new bureaucracy that could stifle innovation and make loans more expensive isn’t so great. Some compromise will be necessary on this part of the plan.

It’s true, as critics of the Obama proposal contend, that there were many federal regulations and oversight bodies in place in recent years, yet they still failed to prevent the financial crisis we now face.

However, it doesn’t follow that no new regulations are warranted. Unregulated financial instruments performed even worse, in many cases, than those that were ostensibly regulated.

President Obama has reached far with his proposed new financial regulations, perhaps too far in some respects. But to say everything is fine and allow business as usual — business as it existed over the past few years — would be even more irresponsible.


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