President Obama unveiled a stem-to-stern overhaul of financial industry regulation Wednesday, promising dramatic changes for banks, consumers, hedge funds and even the inner workings of the Federal Reserve. The ambitious proposal is designed to strengthen a ramshackle system of government oversight that failed to either prevent or mitigate the current financial crisis.
The administration rolled out its 88-page plan amid a full-scale public relations offensive culminating in a 13-minute presidential statement in the East Room of the White House. Addressing an audience that included Fed Chairman Ben Bernanke, members of Congress, and representatives of the financial industry and consumer groups, Obama called for "a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."
Under the Obama plan, the Federal Reserve would get new authority to police all financial institutions — not just banks — whose failure could threaten the financial system. And the government would have new powers to wind up the affairs of financial institutions other than banks, such as insurance companies. Hedge funds would be compelled to register with the Securities and Exchange Commission and a new agency would be created to safeguard consumers against overly complex or fraudulent financial products. The new regulatory blueprint would "protect America's consumers and our economy from the devastating breakdown that we've witnessed in recent years," Obama said.
The sweeping proposal marks an emphatic end to an era during which top policymakers, notably including then-Fed chairman Alan Greenspan, celebrated the ability of market participants to largely police themselves. Now, smarting from the collapse of major institutions such as Bear Stearns and Lehman Bros., the costly government bailouts of insurer AIG and the worst U.S. recession since the 1930s, the pendulum has swung back toward an ethos of robust government oversight.
"Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight," the president said. "Our entire economy has been undermined by that failure."
The Obama plan also breaks with the pre-crisis period by attempting to head off financial bubbles before they form. Greenspan maintained that central banks could not "definitively identify" bubbles until after they had burst. Rather than attempt to prick bubbles before they grew dangerous, it was better, he said, to clean up after they popped.
"The president does not accept the judgment that it's best to let the market forces rip and then when there's an accident, to clean up after. He believes the last two expansions have, to an extent, been bubble driven, and it's important the next expansion rest ... on a new foundation and a much stronger foundation," Larry Summers, director of the National Economic Council, told reporters Wednesday afternoon.