Obama's financial regulation plan more weak tea

by Leigh Graham

categories: Bailout, Federal, Government, News, Policy, The Economy

Published June 19, 2009 @ 12:00PM PT

(Paul Krugman and Diane Casey-Landry on the Newshour)

There's a ton of great analysis out there on Obama's financial regulation plan.  What I'm reading suggests a concensus that the plan does not go far enough.  Bad news for Obama, especially as confidence in him slips to rectify our economy and bring us affordable healthcare.  What's so frustrating about this is that President Obama enjoys a very high overall approval rating.  I think Joe Nocera is right (h/t):

“If Mr. Obama hopes to create a regulatory environment that stands for another six decades, he is going to have to do what Roosevelt did once upon a time. He is going to have make some bankers mad.”

This President of ours is not interested in upsetting any of the power players.  Women, LGBTs, Fox News watchers, no problem.  Bankers, lobbyists, Congress, not so much.  Anyway, on to the meat of the proposal - what's good, and what's not-so-good.

The Consumer Financial Protection Agency, originally proposed by economist-cum-watchdog Elizabeth Warren is promising, but sure to provoke a serious fight in DC.

A major disappointment appears to be giving the Fed even greater power to regulate the financial industry:

But, the absolute, worst part of this financial ‘overhaul’ is giving the Fed any more power. The Fed should instead be slapped and audited for screwing things up as badly as it did. It has destabilized our future economic environment by approving all sorts of mega-mergers during the heat of the crisis last fall, instead of putting on the brakes.

The biggest bank bailouts went to Citigroup and Bank of America. Citigroup topped the bank bailout charts, grabbing $386 billion in federal, public-sponsored assistance. Bank of America got $220 billion, as much a AIG. Who was their regulator? The Fed.

Yet, the OTS gets annihilated for its screw-ups, but the Fed gets rewarded. Why? Because the Fed is the bankers’ bank. During the past 15 months, the Fed has amassed $7.87 trillion worth of facilities and other entities through which it has lavished cheap loans in return for questionable collateral from the banking system. It has kept the true nature of these transactions a secret despite numerous FOIA requests, and is the subject of HR 1207, legislation aimed at digging beneath the Fed's lack of transparency.

With that kind of track record, the Fed shouldn’t be crowned the systemic risk regulator, in the supreme position of supervising the largest most interconnected firms. This is plain wrong. Rewarding an entity that didn’t perform its regulatory obligations to begin with, paid historically unprecedented sums to correct its mistakes, didn’t exercise its ability to contain the size of banks - blessing rather than questioning ones that would become 'too big' (to fail or to regulate), and shunned transparency, with a bigger seat at the regulatory table is not the way to stabilize and provide necessary responsibility to the system.

Why aren't Obama & Co. breaking up the banks, taking apart those now deemed "too big to fail" so as to reduce the overall systemic risk in the system, rather than just trying to keep a better eye on an already unstable system?  Why aren't we making the regulators an independent governing body?

And what about the inherent conflicts of interest between the ratings agencies and the banks, and the sheer lack of corporate governance?  Should we pursue an independent investigation a la the Pecora Commission of the 1930s?

It's frustrating; I really want to be excited by Obama's policy proposals.  But I'm reminded that I just shouldn't hold my breath.