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Obama's Blueprint for Reform Concentrates Still More Power in Hands of the Fed

Politics / Central Banks Jun 17, 2009 - 01:57 AM GMT

By: Mike_Shedlock

Politics

Best Financial Markets Analysis ArticleThe Washington Post has released a "near final" draft of Obama's financial reform proposals. As expected, the paper whitewashes the role of the Fed and Fractional Reserve Lending as well as the role of unfunded Congressional spending in creating the mess. Instead, Obama's plan gives more power to those responsible for creating the mess.


Please consider Obama Blueprint Deepens Federal Role in Markets.

The plan seeks to overhaul the nation's outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building.

The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.

The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.

It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.

Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.

The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.

And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.

"Speed is important," Obama said yesterday in an interview aired by CNBC. "We want to do it right.

My Comment: Speed is always important when you are attempting to to set yourself up as prosecutor, judge, and jury. Should anyone actually have the time to dig into the details, the odds are they would find many reasons to not go along.

President Bush's mad rush to judgment on the Iraq war is a prime example of the essence of speed. Bush desperately wanted to wage war on the idiotic ideas that Iraq had WOMDs and Iraqis they would welcome us with open arms. Bush was wrong on both counts but the war was rushed through because "speed was of the essence". Had Congress taken a few weeks to study the evidence, a needless, stupid war might have been avoided.

Now Obama is the one who does not want debate.

The administration's plan leans heavily on the Fed, expanding its role as the regulator of the nation's largest banks such as J.P. Morgan Chase and Goldman Sachs to include other giant financial firms, such as the insurance companies American International Group and MetLife.

The agency, which has greater independence from the political process than other regulators, would have broad authority to impose special requirements on those companies, such as mandating that they set aside a larger percentage of their assets against possible losses than smaller firms. Such a requirement could limit large companies' appetite for risk, but also their profit and growth.

My Comment: Note how increased power is given to the Fed, an agency that did not see this coming and whose premise is that bubbles are best dealt with after the fact because no one can tell bubbles in advance.

The best way to limit appetite for risk is to prevent the Fed from manipulating interest rates to ridiculously low levels. The way to do that is to abolish the Fed, not strengthen its power.

The plan calls for a council of regulators to consult with the Fed, including the Treasury secretary and the heads of the other financial regulatory agencies: The Securities and Exchange Commission, Commodity Futures Trading Commission, the Federal Housing Finance Agency and the agencies that regulate banks.

My Comment: Regulation created the problem so the bureaucratic solution is a given: still more regulation.

A second element likely to provoke fierce debate is the establishment of a Consumer Financial Protection Agency.

The agency would have a mandate to increase the availability of financial products in lower-income communities and other underserved areas, in part by enforcing the Community Reinvestment Act, which requires banks to make loans everywhere that they collect deposits.

My Comment: The CRA is blatant stupidity as well as hypocritical. Banks were forced to make loans where they made absolutely no sense and in doing so created the mess of inner city subprime loans that we see. Now the solution is to force more stupid lending on the basis of where people live than on the merits of the loan. This is asking for more trouble and it is a certainty more trouble will be found.

Several ideas have been dropped as the administration picks its battles. The plan will not include a new way of regulating insurance companies at the federal level. The insurance industry, which is regulated at the state level, is deeply divided, and the White House anticipated a distracting fight. The administration instead plans to create an office in the Treasury Department to monitor the insurance industry.

Some of the largest insurance companies could still fall under the scrutiny of the Federal Reserve in its new role as a systemic risk regulator.

Artist's Rendition of Obama's Plan

Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building.

Artist Keith Taylor was able to sneak into the room where all the planning was taking place. He managed to capture this rendition of the plan.


Keith asked me to remind everyone of this important fact:
Don't Worry, The Banking System Is Sound

Fed Uncertainty Principle In Action

Flashback Thursday, April 03, 2008

Inquiring minds are taking another look at the Fed Uncertainty Principle.

Uncertainty Principle Corollary Number Two

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

That prediction was made well in advance of any of the Fed's power grabs. I wish I was wrong.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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