My initial reactions to President Obama’s financial regulation proposal

Submitted by Edward Harrison of Credit Writedowns.

Having read through the draft of President Obama’s financial regulatory proposal, my initial reaction is largely positive. He sets the right tone and says all of the right things. However, the devil is in the details and we will need to see how these firm up as these ideas become law. In my view, there are a number of likely turf fights which will result from this proposal which will present a challenge. Moreover, the changes do give the executive branch via the Treasury and the Federal Reserve more power, and it is unclear both whether this is wise and whether it will be acceptable to members of Congress.

The President begins his proposal by acknowledging this severe crisis, the worst since the Great Depression, has been a severe blow to ordinary Americans and their access to credit for homes, cars, education, and businesses. He then states that the ultimate cause lies decades in the past due to complacency stemming from the apparent resilience of the U.S. economy. To be sure, crises did occur, but they never penetrated Fortress America’s defenses. I see this as a veiled rebuke of the Greenspan Era (see my post “The US Economy 2008” for a similar take on how the damage to the U.S. economy made this crisis different). He also decries a lack of transparency and the looting of American consumers before summing up that we must act now.

The President then makes five overarching points:

  1. Reforms must promote robust oversight and regulation. I see these points as an explicit separation of the two tenets of the de-regulation movement – oversight and regulation – into separate issues. I anticipate Obama will move to greater oversight, but still allow de-regulation to ensue largely as it had done before the crisis.
  2. Reforms must remove the balkanization of regulatory agencies. This is where problems lie because the concentration of power lies with the Treasury and the Federal Reserve. The executive branch already has too much power in the U.S. Government and the Federal Reserve has fallen prey to cognitive regulatory capture, making it an unlikely choice for systemic risk regulator (which I have dubbed SiRR).
  3. Reforms must protect consumers better. While this is a very necessary inclusion, let’s see how robust the actual measures are.
  4. Reforms must address operational issues that tie regulators hands. This point is clearly inserted to absolve Paulson, Bernanke and Geithner of any responsibility for the collapse of Lehman Brothers and the resulting panic this collapse caused. Do not be fooled by this point, it serves no other purpose.
  5. Reforms must be international. Yes. This is a must. We cannot stop at domestic reforms because much of the problem has been the globalized nature of finance and financial institutions. Companies like Deutsche Bank, HSBC, Citigroup, UBS, and Santander – to name a few – all have more significant operations outside of their country of domicile than domestically. I view this point as a call to other countries to institute similar reforms and to ready themselves for international cooperation in regulating finance going forward.

On the whole, this is a good effort. However, this is just a blueprint to set the tone for eventual action – much as Geithner’s bailout plan for a plan was merely a blueprint. In my view, this is positive because it means we can still debate many of these issues and affect change before legislation is enacted in order to ensure a robust yet market-oriented approach which limits concentration of power in one entity or branch of government.

Below is a copy of the President’s prepared remarks.

Obama’s Financial Sector Reform Proposal

Draft of President Obama’s Financial Regulation Proposal – NY Times

Update: you will notice that point 2 gives new powers to the Treasury and the Fed, while point 4 absolves the leaders of those institutions of blame for the worst unforced error during the crisis. Clearly, point 4 is necessary if you have point 2.
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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Hugh

    The truth about Obama is that he gives a good speech but he is rotten at results. His regulatory recommendations are in keeping with this pattern.

    Oversight without firm regulatory control means nothing. Or worse than nothing, a continuation of the same practices that led to the bubble and then the meltdown.

    How regulators are split between agencies is irrelevant if, in fact, they do not regulate. The tiny OTS "regulating" a giant like AIG was a joke, but the SEC remains a business friendly facilitator. The CFTC looks like the new of face of Obama regulation. Traders will pretend to fill out forms and the CFTC will pretend to read them.

    Consumer protection. One of the things I have learned from parsing Obama speeches is comparing what he said with what he could have said. So consumer protection sounds a lot more like some moves to clarify language marginally rather than establish penalties for those engaged in fraudulent and misleading dealmaking. Obama still hasn't confronted or even acknowledged the massive levels of fraud associated with the housing bubble.

    I agree that the line about regulator hands being tied is a cop out. Throughout these crises, the Treasury and Fed have acted aggressively when they wanted to with not too much concern for existing law but when they did not or wished to indulge in some CYA, suddenly their hands were tied.

    Given how empty the Obama-Summers-Geithner plan for regulation looks likely to be, international regulation will probably be little more than a PR exercise.

    As I said somewhere yesterday, although only one piece of regulatory reform, we will know that such reform is serious when we see a real push to get Glass-Steagall re-imposed.

  2. marsha donner

    I could not agree with Hugh (above) more! without a Glass-Steagall like effort its all BS. they continue to uphold too big to fail rather the too big to exist. they want to regulate the too bigs to fail, not dismantle them.
    the obvious collusion of banks/brokerage in manipulating (legally i guess) the market place is destructive at best. Goldman upgrades WF, WF up grades MS, etc..what a joke!
    Goldman sell state bonds, then brokerage arm goes around and sell CDSs (insurance protection…sounds like a racket to me)..then trades the CDSs just sold by manipulating the rating on the State of Ca. (or fill in the blank).
    no clear mention of not allowing CDSs to be sold to anyone not holding underlying interests in the insurance.
    just putting the fox to guard the hen house it seems.
    and the idea of big is better has not relationship to to main street…or how big banks moving into territories and getting market share as the test of financial value without reference to the affect on the towns and cities involved just continues to show the wall street centric view of things.
    nothing substantial is/will change. no direction on fraudulent and misleading accounting practices will happen.
    and all under the auspices of compromise…a part is better then nothing..don't pick a fight with wall street.
    clearly, it only takes a few big banks/brokerages firms..using tax dollars "vote" this down with a few 'bad days'in the markets (blackmail if ever there was such) reassert their control over 'change we can count on'

    mainstreet seems to be ignored again and again in all this BS. and i voted for this administration..what a huge disappointment indeed.

  3. marsha donner

    sorry, one more thing

    Edward Harrison saysOn the whole, this is a good effort. However, this is just a blueprint to set the tone for eventual action – much as Geithner’s bailout plan for a plan was merely a blueprint. In my view, this is positive because it means we can still debate many of these issues and affect change before legislation is enacted in order to ensure a robust yet market-oriented approach which limits concentration of power in one entity or branch of government.

    when the real issues are not even on the table debate is meaningless at best and a fraud!
    too big to exist is not on the table. breaking up the clearly incestuous banks/brokerage/insurance businesses is not on the table.

    the idea of a shadow ….whatever is not on the table.

    all these things are presented as a GIVEN only the how to regulate is being discussed. clearly that is the agenda of wall street and its administration shills/spokesmen/implementors. augue around the edges but leave to rotten core untouched.
    i am sick of this

  4. Eric L. Prentis

    Summers and Geithner are on the take con men. Bernanke, at the Federal Reserve, is a shill for the banking elite, who currently has the power to destroy the US financially and shouldn’t be given any more influence over the economy. President Obama is either a dupe or biding his time until the present economic policies are confirmed as failures by the average American and Obama can blame it on his current politically-connected, money-class henchmen: let’s hope it’s the latter.

  5. Larry

    The fact that you support the power grab by those that caused these problems and the socialist Obama(actually far worse)say it is time to remove you from my favorites list. I dont support socialists or facists. What happened to this blog? Clearly you have greenshoots and Obama worship eating your braincells and taking away any good judgement you ever had. The banksters are making the final big move and you support it. You sicken me.

    Goodbye Naked Capitalism

  6. scepticus

    Failure of regulation, blah blah blah. Yes there was a failure of regulation worldwide amongst developed nations but IMO this is a symptom not cause.

    Fundamentally this crisis arose because the welfare/pensions ponzi requires ever growing population to perpetuate itself. Likewise for the capital markets – they have been predicated on robust population growth for hundreds of years.

    Now the pop growth rate has fallen off the whole edifice is tottering. Regulation, credit etc are but fauna adorning the tectonic plates of demographics and culture, always the underlying driver of everything.

    Take a look at this article written in 2005 and see if doesn't have the ring of fundamental truth about it, as well as a very plausible and very dark vision of the future.

  7. eeeeeekonjohn

    Correct me if I'm wrong but wasn't the Fed the ultimate regulator already via its control of this thing called the interest rate?

  8. "DoctoRx"

    Any proposal, such as the Team Obama one, that increases the Fed's powers is a wrong-track proposal IMO.

    This is one of the relatively few times when I disagree w Dr. Harrison.

    The Fed is increasingly being used to do the power elite's bidding while the elected Government can claim plausible deniability.

  9. Edward Harrison


    While I think this is a good effort, I have had a chance to go through it and I am not nearly as excited about it as the tone of this post would have you believe.

    One reason the tone here is probably fairly upbeat is that I feared much worse. Nevertheless, I have a lot of reservations about this thing and have written another post spelling those out.

    In the end, I am left feeling that Obama is a politician staking out the middle ground as a moderate in a political game and less a reformer and change agent as he had campaigned.

    For those of us who wanted change, this is disappointing.

  10. alexant

    What a naïve post. I find myself much in agreement with fellow poster Larry. I understand that Yves is very busy, but I miss her incisiveness. It sure beats stuff like:

    "In the end, I am left feeling that Obama is a politician staking out the middle ground as a moderate in a political game and less a reformer and change agent as he had campaigned."


    "…this is positive because it means we can still debate many of these issues…"

    Yes, I'm sure the banking cartel would be quite open to democratic input on this. Perhaps they will schedule some town hall meetings and travel around the U.S. to hear the American people's thoughts on how best to preserve oversight™ and transparency™ while being RAPED AND LEFT FOR DEAD. Perhaps, this time, when we call and fax our corrupt-to-the-core worthless sacks of shit, I mean representatives, they will actually vote in alignment with what 90-percent-plus of their constituents are imploring. Jesus Christ. What is wrong with you?

    Yves, please come back. I miss the old nekkid capitalism. I would rather read chapter-a-day on pensions than this pap.

  11. VG Chicago

    But wait! We need to give "trickle down economics" and reaganomics another 25 years before we dismiss it…

    Vinny G — "wisdom aplenty"

  12. VG Chicago

    alexant: "What a naïve post."

    Careful. No criticism whatsoever of these posts shall be tolerated! :)

    Keep this in mind: "In Oceania, in which any potential leadership is immediately rooted out by the Thought Police and any divergence from orthodox behavior is not tolerated, that leadership is not likely to develop." (George Orwell, 1984)

    Vinny G. (actually, "Dr. Vinny G." but not making a big deal about it…lol)

  13. LeeAnne

    The effect we are seeing is planned -the colonization of the American people by a Nazi type movement, an extension of the 'vast right wing conspiracy' first articulated by Hillary.

    Previously it was the mean, ugly and nasty face of the Bushies, now a group more polished but with the same agenda. It can no longer be denied; it is exactly the same agenda, just more relaxing to see a more intelligent and less ugly group on stage.

    Never confuse personality for character.

    It is almost impossible to imagine any government behaving this way unless they are confident of the protection of an overwhelming military establishment, a police state, and pervasive surveillance of citizens (with constant announcements in public spaces to be suspicious, very suspicious, of your neighbors, and don't fail to report them), such as that built since 9/11 at the same time looting of the Treasury began, the safety net and basic health services severely threatened, military men and women blatantly abused, elimination of posse comitatus, the right of presidential operatives to pick up anyone they please, stop and search, operate secretly with gross violations of human rights, suppress justice department investigations of criminals in Iraq, in financial fraud, the previous administration, torture by other invented names, an ongoing heavily financed propaganda labotomization project, and destruction of the rule of law in finance. Only criminal minds could dream up and support such a scenario and imbed it for future unimaginable crimes. These criminal minds now hold total sway over the people of this country.

    Could anything be more blatantly cynical than 'free market' rhetoric while the finance/government
    out in the open criminally manipulates markets?

    It is the labotomization project that is most frustrating for its elimination of reasoned debate and mature experienced voices in government and media; nothing more profound than cheap punditry is tolerated with increasing levels of hate.

    There is no real debate where basic principles are ignored. Felix Rohatyn articulates them as necessary for free markets: '…ethics, regulation and oversight and, referring to boondoggles in big government projects,' and '…you can't build a telephone booth without oversight.'

    I hope you'll enjoy watching Felix Rohatyn as I did; he's a voice in the wilderness, a respected Wall Street investment banker of the old school and public servant who served powerfully during the New York City 1970s financial crises, an expert on the RTC (S&L crisis) who has been our Ambassador to France:

    c-span book tv

  14. LeeAnne

    the link to Felix Rohatyn's c-span interview follows:


    If the link doesn't work, the book is at C-Span Book TV, After Words: Felix Rohatyn, author "Bold Endeavors: How Our Government Built America, and Why it Must Rebuild Now; interviewed by Greg Ip, The Economist

  15. VG Chicago

    LeeAnne: Could this mess have been created by sheer incompetences, greed, and stupidity? Or, does it have to be a Nazi shadow government all powerful and all-wise at work here?

    The principle of Occam's Razor states that a simpler explanation prevails over more convoluted ones. I think mine, attributing this to incompetence, greed, and stupidity is a lot simpler than yours.

    Vinny G. — conspiracy theory debunker extraordinaire

  16. skippy

    @VG said…The principle of Occam's Razor states that a simpler explanation prevails over more convoluted ones…

    Occam's Razor is, to me, the gaming math for Idiots version, flip a coin a million times and one side wins out by a bit, this is significant in a repetitive process, all tho as Talab points out the trick is not to be on the wrong side of the coin when Quantum effects show its dark side, to our perspective.

    History proves you wrong, old boy. What Leeann states is ruthless forces of power not unlike her example, do weld considerable sway in the scheme of things and with out constant vigilance can gain prominence, I would be the fool on a fools errand rather than complicit to the crime.

    BTW you speak as a person experienced of hard times, some day maybe we can hook up and go dumpster diving with some of your homeless clients. Then we can calabotrate on the new best seller "The Best Dumpsters in the USA"



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