Yesterday, in the first part of this column, I argued that the report places too much blame on the private sector and not enough on the government and that the report is fundamentally a biased interpretation of events. Today, I continue outlining the main premises of the document and suggest that there will be tough battles ahead and that the proposed fate of the bill remains unclear.
(4) “Provide the government with the tools it needs to manage financial crises.” The premise here is that the government needs more and better-defined legal powers to intervene in financial crises instead of facing the untenable choice between bailouts and financial collapse. The plan emphasizes the need for the government to be able to resolve non-bank financial institutions whose failure could create serious systemic risk. It proposes to counterbalance this broader authority by revising for improved accountability the emergency lending power of the Fed, which has come under attack for its opaque loans -- as well as secretive interventions now under congressional scrutiny -- during the current crisis.
(5) “Raise international regulatory standards and improve international cooperation.” The premise here is that although global crises require global solutions, in the absence of a powerful supranational financial regulator, the successful efforts of any single government for better financial regulation in the era of financial globalization require the cooperation of other governments. The plan discusses extensively and commendably how to get such cooperation through international institutions such as the Bank for International Settlements, the International Monetary Fund (IMF), the Financial Stability Board and the G-20. We will see to what extent such cooperation, promised at the London G-20 summit in April, will be forthcoming at the next G-20 summit in September. Last Friday at their Brussels summit, EU leaders announced their own plan for financial regulatory reform, focusing on macro-prudential supervision, after much squabbling between the UK, which does not belong to the eurozone, and members of the eurozone regarding the powers of the European Central Bank (ECB). The EU plan would establish a European Systemic Risk Council, to be only advisory, without the power to act, yielding to pressure from the UK. This intra-EU skirmish presages major obstacles to coordinated global financial regulatory reform in the months ahead.
The Obama plan, either in its entirety or in part, has already come under attack in Congress from Democrats as well as Republicans. There is concern over the expanded powers of the Fed as a super regulator in the plan to deal with systemic risk. The Consumer Financial Protection Agency is opposed by powerful groups such as the American Bankers Association and the American Chamber of Commerce. Even some regulatory agency heads, such as Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair, have begun to criticize the plan publicly. One major deficiency of the plan is its failure to come to grips with the “too big to fail” syndrome that results in moral hazard. This issue is tackled directly and aggressively by the Swiss National Bank, setting an example for the US and the EU, in its Financial Stability Report 2009 issued last Thursday. Congress is expected to begin drafting the legislation required for most of the Obama plan next month. The Obama administration is hoping for the passage of the legislation by the end of the year, which might be too ambitious, as it is also gearing up for a major healthcare reform fight that will prove to be at least as controversial as its financial regulatory plan. Whether the Obama plan, even if it is enacted, will be able to prevent or at least contain the next financial crisis is debatable. Remember the saying about the generals who are preparing to fight the last war!
