Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Washington Moves to Muzzle Wall Street

Politics / Market Regulation Jun 19, 2009 - 07:17 AM GMT

By: Money_and_Markets

Politics

Best Financial Markets Analysis ArticleMike Larson writes: This was the week that Washington decided to muzzle Wall Street. Specifically, the Obama administration revealed a sweeping series of new proposed regulations and reforms — all designed to prevent the next great financial catastrophe.


The plan is multi-faceted and complex. Among other things, it aims to increase the Fed’s power, regulate the derivatives and securitization markets more effectively, protect consumers from the potential harm of complex financial products, and more. It’s been a long time in the making, with input from key policymakers, consumer groups, academics, and others.

Will these reforms work? Will they hamper innovation? Will they have unintended consequences, like so many of the government’s other programs?

I know it might be somewhat unsatisfying, but the answer is: We simply don’t know yet. We’ve seen all kinds of regulations passed and implemented over the years. We’ve created all kinds of new government agencies.

With his proposed Financial Regulatory Reform Plan, Obama hopes to prevent the next great financial catastrophe.
With his proposed Financial Regulatory Reform Plan, Obama hopes to prevent the next great financial catastrophe.

But because of industry opposition — and a lack of backbone and foresight among regulators — they’ve frequently failed to prevent future crises. The only way these new regulatory schemes will work is if policymakers actually USE the tools they’re going to be given.

So what are those tools? What’s coming down the pike? How will it impact you? Let’s talk about that now …

The Five-Point Regulatory Plan

The government’s latest regulatory plan is certainly ambitious. You can read the whole 89-page blueprint online here if you’re so inclined.

The “money quotes” justifying why the Obama administration is doing what it’s doing can be found in the following passage:

“While the crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system. Gaps and weaknesses in the supervision and regulation of financial firms presented challenges to our government’s ability to monitor, prevent, or address risks as they built up in the system …

“We must build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.”

So if that’s the “why” behind the plan, “how” will it work? Well, the proposed reforms are broken down into five major areas:

Plan Component #1: Increase the Federal Reserve’s power. The Fed will be allowed to rein in the biggest financial companies, even those that don’t own banking subsidiaries (think insurance companies here). The administration also wants to eliminate the thrift charter used by institutions like Washington Mutual and allow the Fed to put additional restrictions on systemically important institutions, such as requiring them to hold more capital against possible losses.

Plan Component #2: Police the securitization and derivatives markets.Securitization is the process by which underlying loans (mortgages, auto loans, credit cards) are turned into fixed-income securities owned by investors. As I explained in my July 2007 white paper, the securitization market ran amok in the early-to-mid-2000s.

The regulatory overhaul of finance rules would give the Fed wide-spread power over financial institutions, including insurance companies.
The regulatory overhaul of finance rules would give the Fed wide-spread power over financial institutions, including insurance companies.

Now, the government wants to increase market transparency and improve the effectiveness of the credit ratings agencies, which rate mortgage-backed and asset-backed securities. It also wants to force originators of loans packaged into securities to hold some of the credit risk, rather than handing it all off to someone else.

Finally, it would change current compensation practices so that brokers and loan originators would earn their income over time, depending on the performance of the loans they make, rather than all up front based purely on loan volume. These measures are designed to increase the financial incentive for brokers, lenders, and loan packagers to actually write and bundle good loans, rather than just more loans.

As for derivatives, new record-keeping and reporting requirements would apply to contracts traded over the counter rather than in traditional, transparent markets. Other trading activity would be forcibly moved to regulated exchanges.

Plan Component #3: Strengthen consumer protection.The government wants to establish a “Consumer Financial Protection Agency,” whose mandate will be to protect consumers from the potential harm of complex financial products, from mortgages to credit cards.

It will help streamline disclosures so that consumers get simpler and more accurate information about potential risks. It may also be authorized to force banks to offer so-called “plain vanilla” loans, like 30-year fixed mortgages, in addition to more complicated products. The Federal Trade Commission and Securities and Exchange Commission would get additional authority to police financial products and markets, too.

Plan Component #4: Establish “wind down” authority. Seizing and winding down large financial firms is a messy process. While the FDIC can take over smaller banks and sell them off in whole or in pieces, the government has maintained it can’t effectively do the same thing for multi-dimensional, global, interconnected firms (think AIG and Citigroup).

The administration wants to change that. It would like to establish a “resolution regime” that would work like the FDIC process, but apply to these larger, more complex institutions.

Plan Component #5: Increase international coordination. Lastly, the administration wants to establish a process whereby U.S. and foreign regulators coordinate more closely with each other in the regulation of multi-national firms. One aim is to eliminate jurisdiction-shopping — where a company might elect to move from country A to country B to benefit from country B’s lighter regulatory burden.

So Will These Plans Work?

Again, that’s the biggest question. And the answer depends on whom you ask. The Securities Industry and Financial Markets Association, or SIFMA, is the trade group for Wall Street securities firms, large banks and asset managers. It released what you might call a qualified endorsement of the administration’s plan, saying:

“The financial turmoil of the last year revealed deep and serious flaws in our regulatory system. The financial services industry believes it is critical to our nation’s economy that we work with policymakers in Washington to enact comprehensive reform this year to improve the accountability, transparency, investor protection and oversight of financial markets. With their proposals today, the Administration has moved this critical debate from broad discussion to specific action — this is an important step forward.”

A spokesman for the Cato Institute (a Washington-based public policy research foundation), Gene Healy, was much less enthusiastic, though. He told a reporter that “It does begin to look like you are getting into a situation where there is no area of American life that isn’t going to have an executive officer bureaucrat dedicated to it.”

Some in Congress, including John Boehner, aren’t convinced that more regulation is the answer.
Some in Congress, including John Boehner, aren’t convinced that more regulation is the answer.

House Republican Leader John Boehner weighed in with his own critique on Good Morning America. He said, “If you look deeply … we’ll have the federal government deciding what interest ought to be charged on credit cards, having the government decide what kinds of financial products are available … it’s just going to be too big of a foot on an industry that already is having financial problems.”

Me? I’m hopeful we’ll see meaningful action this year. More importantly, I’m hopeful that policymakers who are empowered to take new actions to police the markets and protect consumers actually exercise them. That’s the key to making any of this stuff work.

It’s unclear exactly when these provisions will start to impact the disclosures you get when you take out a mortgage, or when you’ll be able to protest to the new consumer protection agency should you get shafted on a financial transaction.

Many of the proposals will require Congressional action. Additional tweaks, and maybe even wholesale changes, are likely as the House and Senate consider the administration’s plan over the coming months. But you definitely want to keep an eye on Washington here, because the way we borrow, spend, and invest will be profoundly impacted in the long run.

Until next time,

Mike

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules