Obama’s Reform
The reform of the financial system of the United States, which was approved by the Senate on Thursday, confirms the notable capacity of modern capitalism to transform itself following a crisis. President Barack Obama stated that this is “the toughest financial reform since the ones we created in the aftermath of the Great Depression” and expressed his confidence in the fact that the measures adopted in order to overcome the shocks in the system will also constitute a firm base for a new economic expansion cycle.
We will have to wait and see this in practice. The implementation of the 2,300-page-long project will impose a heavy cost on both the financial system and the government, which will have to hire more staff. The challenge in the next few months is to see if the credit flow will be able to increase in a relatively short period of time or if the new regulations will cause reductions in lending and delay the economy’s recovery. There will be a transition period, and as the bill's main writer and chairman of the Senate Banking Committee, Democratic Senator Christopher Dodd, explains, “We won't know the full results of what we have done until the very institutions we have created, the regulations we have suggested and provided for are actually tested."
New control mechanisms were created, such as the Financial Stability Oversight Council, extending the Federal Reserve Board’s jurisdiction. It will now have the power to intervene in the affairs of financial institutions if irregularities are spotted before declaring them bankrupt. It is something very similar to the power of Brazil’s Central Bank to decree extrajudicial interventions, but in the U.S. this is a novelty. The Federal Reserve Board will further strengthen its structure with the creation of the Consumer Financial Protection Agency. Within the Treasury Department, a Federal Insurance Office and a council formed of high-ranking officials will be created in order to analyze market activity and crisis risks.
This new structure is being criticized by the Republican opposition, which as always, is against any measure that might interfere in the freely operating markets. This is an old controversy. Remember that economist Paul Volcker, former chairman of the Federal Reserve, was fired by Ronald Reagan back in 1987 exactly because he was against the deregulation sought by the White House. But Volcker, currently an economic adviser to the Obama administration, is back on the scene. The Volcker Clause contained in the package is perhaps the most important measure taken in order to contain speculations in the financial markets. According to this clause, banks and funds will only be allowed to invest three percent of their capital in hedge transactions and private equity operations — acquisitions of shares or control of firms for corporate restructuring — which will put restrains on derivative transactions. But this is not all: this type of fund will have to be registered with the Securities and Exchange Commission. The former Fed chairman was arguing that speculative shares, especially the ones from hedge funds, were the main cause of the 2008–2009 credit crunch.
Now the opposition is criticizing the fact that measures to control the activities of Fannie Mae and Freddy Mac were not included in the reform. The two giant mortgage loan institutions that operate under the government’s umbrella are pointed out as being responsible for the subprime loans disaster that preceded the Wall Street crisis. But the promise to reform these institutions was made for 2011.
There is no doubt that the financial and health system reforms — two major legislative victories for of the Obama administration — will be the focal point of the midterm elections in November. The President was courageous enough to take advantage of the Democratic majority in Congress to pass the bills. He kept his campaign promises, although he didn’t go as far as some voters would have wanted.
What seems to be clear is what the United States has learned from the recent crisis: the countries who regulated their financial systems were the ones who were least affected. It is, undoubtedly, a changed world.
We will have to wait and see this in practice. The implementation of the 2,300-page-long project will impose a heavy cost on both the financial system and the government, which will have to hire more staff. The challenge in the next few months is to see if the credit flow will be able to increase in a relatively short period of time or if the new regulations will cause reductions in lending and delay the economy’s recovery. There will be a transition period, and as the bill's main writer and chairman of the Senate Banking Committee, Democratic Senator Christopher Dodd, explains, “We won't know the full results of what we have done until the very institutions we have created, the regulations we have suggested and provided for are actually tested."
New control mechanisms were created, such as the Financial Stability Oversight Council, extending the Federal Reserve Board’s jurisdiction. It will now have the power to intervene in the affairs of financial institutions if irregularities are spotted before declaring them bankrupt. It is something very similar to the power of Brazil’s Central Bank to decree extrajudicial interventions, but in the U.S. this is a novelty. The Federal Reserve Board will further strengthen its structure with the creation of the Consumer Financial Protection Agency. Within the Treasury Department, a Federal Insurance Office and a council formed of high-ranking officials will be created in order to analyze market activity and crisis risks.
This new structure is being criticized by the Republican opposition, which as always, is against any measure that might interfere in the freely operating markets. This is an old controversy. Remember that economist Paul Volcker, former chairman of the Federal Reserve, was fired by Ronald Reagan back in 1987 exactly because he was against the deregulation sought by the White House. But Volcker, currently an economic adviser to the Obama administration, is back on the scene. The Volcker Clause contained in the package is perhaps the most important measure taken in order to contain speculations in the financial markets. According to this clause, banks and funds will only be allowed to invest three percent of their capital in hedge transactions and private equity operations — acquisitions of shares or control of firms for corporate restructuring — which will put restrains on derivative transactions. But this is not all: this type of fund will have to be registered with the Securities and Exchange Commission. The former Fed chairman was arguing that speculative shares, especially the ones from hedge funds, were the main cause of the 2008–2009 credit crunch.
Now the opposition is criticizing the fact that measures to control the activities of Fannie Mae and Freddy Mac were not included in the reform. The two giant mortgage loan institutions that operate under the government’s umbrella are pointed out as being responsible for the subprime loans disaster that preceded the Wall Street crisis. But the promise to reform these institutions was made for 2011.
There is no doubt that the financial and health system reforms — two major legislative victories for of the Obama administration — will be the focal point of the midterm elections in November. The President was courageous enough to take advantage of the Democratic majority in Congress to pass the bills. He kept his campaign promises, although he didn’t go as far as some voters would have wanted.
What seems to be clear is what the United States has learned from the recent crisis: the countries who regulated their financial systems were the ones who were least affected. It is, undoubtedly, a changed world.