Obama's Financial Sector Proposals: Oversight v. Change

Obama today announced his proposal for restructuring the financial sector, and although there are some excellent parts of the proposal, with real teeth on them (new standards on leverage, for example), the overall gist of the package is oversight. His accompanying explanation also focused on oversight:

Mr. Obama told reporters on Tuesday that a "lack of oversight" allowed what he called "wild risk-taking." He said it led to "very dangerous" conditions that imperiled the global economy.

He believes there need to be more guards on watch, in effect. More (and more independent) weathermen and women, more border guards. In this view, the crisis happened--bottom line--because not enough good people were watching out for risk.

I think this is the wrong view. Instead, real reform has to include a recognition of the political economy that led the watchers (the Fed, the OTS) to not see the risk, or to allow it. Real reform has to include structural reforms, like breaking up massive financial institutions that are still exercising disproportionate political power over policies that are supposed to constrain them.

For a great breakdown of the proposal, and the "Good, Bad, and Ugly" parts, read Robert Weissman's review here.

The New York Times article about the proposal, cited above, suggested political reasons for Obama's timidity in this area. If that's right, I think the political bet is misguided; Americans are far more open to entrepeneurial efforts in reforming the economy than I gather many in the administration suspect. As the economy continues to falter, the man on the bus will not be happy with the plea that "we brought more oversight"; he would rather hear that "we brought change."

Comments (30)

1. As Tim Weiner wrote in an excellent (though mostly unrelated) article in THE NATION (June 22, 2009, page 8):

   "OVERSIGHT is a word with two meanings - to oversee and to oversleep."

   Thank you for the article, ZT, and thanks also for the link to Robert Weissman's excellent summary.

   Posted by JakobFabian at 06/17/2009 @ 2:09pm

2. Again, where at the point where the Right says "Obama is imposing socialism!!!!" (by returning us to the mid-20th Century version of Governmental oversight)....

   and the Left is disappointed that "Obama ISN'T imposing socialism!!!!"

   I'll be happy with some "Eisenhower" and not dream of some "Norman Thomas", as I think most of the general public will be.

   Posted by Mask at 06/17/2009 @ 3:06pm

3. "The biggest sticking point may be the role of the Federal Reserve, the U.S. central bank. Obama envisions the Fed overseeing the largest financial firms to ensure that they are not taking excessive risks that could destabilize the economy.

   But several top Democrats and Republicans questioned whether that would vest too much authority in an agency that has already drawn the ire of many lawmakers for its role in the costly bailouts of Bear Stearns and AIG.

   "There's not a lot of confidence in the Fed at this point," Senator Christopher Dodd, chairman of the Senate Banking Committee, said on Wednesday.

   Senator Richard Shelby, the committee's ranking Republican, said the Fed had "utterly failed" as a regulator and putting it in charge of regulating systemic risk would be piling on too many responsibilities."

   Hope and change seem desperately foolish ventures for the Obamanation that makes desolation.

   Posted by BigPasture at 06/17/2009 @ 11:58pm

4. Weissman's analysis is excellent.

   The Q is often being raised, why isn't Obama more like FDR & less like Bill Clinton?

   Obama is a willing captive, FDR was not. Obama is immensely flattered to be idolized, or at least shown great deference, by the very rich & powerful, just like Clinton. FDR, having grown up in the world of the rich, wasn't impressed by them & saw through them.

   Obama doesn't resemble FDR, and he is too close to Bill Clinton in this respect: it may prove a fatal weakness, an apparent willingness to be bamboozled fueled by an eagerness to be accepted & fawned upon, indeed enriched by circles of those perceived superior because they're wealthy, i.e. the banksters & their well paid mouthpieces.

   Posted by sloper at 06/18/2009 @ 06:50am

5. Fareed Zakaria has an interesting article, inexplicably titled "The Capitalist Manifesto: Greed is Good (to a Point)."

   In one paragraph, he covers some of the same ground as Robert Weissman:

   "Many of the regulatory reforms that people in government are talking about now seem sensible and smart. Banks that are too large to fail should also be too large to be leveraged 30 to 1. The incentives for executives within banks are skewed toward reckless risk-taking with other people's money. [...] Derivatives need to be better controlled. To call banks casinos, as is often done, is actually unfair to casinos, which are required to hold certain levels of capital because they must be able to cash in a customer's chips. Banks have not been required to do that for their key derivatives contract, credit default swaps."

   Then, inexplicably again, Zakaria introduces the next paragraph with the sentence: "Yet at the same time, we should proceed cautiously on massive new regulations."

   He continues: "Many rules in place in the 1930s still look smart; the problem is that over the past 15 years they were dismantled, or conscious decisions were made not to update them. Keep in mind that the one advanced industrial country where the banking system has weathered the storm superbly is Canada, which just kept the old rules in place, requiring banks to hold higher amounts of capital to offset their liabilities and to maintain lower levels or leverage."

   Actually, merely restoring the common-sense regulations of the New Deal would likely be a much more "massive" reform than what we are likely to get from Washington D.C. today. But we don't have to SAY that, do we?

   I'm with Zakaria. Let's please not have anything "massive." Let's just restore the good old New Deal -- in its entirety.

   Posted by JakobFabian at 06/18/2009 @ 07:10am

6. I should clarify what I mean by "the good old New Deal -- in its entirety."

   I don't actually mean I want the WPA and the CCC back, though that would probably be nice.

   I DO mean that I want not only the entire corpus of bank regulations from the New Deal restored, but every funny-money scheme invented since 1945 outlawed. No new device for making money off of money has served us well as a society. Get rid of them ALL. The world is NOT a better place because we have "credit-default swaps" now. PROHIBIT them.

   And make Fannie Mae what it was originally, that is, until 1969: a nonprofit.

   Then I'll be happy.

   Posted by JakobFabian at 06/18/2009 @ 07:54am

7. Obama wants to give the Fed more oversight? I almost laughed but it turned into more like a maniacal sputter.

   In May when Rep. Allan Grayson (D-Orlando) asked Inspector General Elizabeth Coleman of the Federal Reserve questions about what happened to $9 TRILLION dollars that came from the Fed's expanded balance sheet, she DID NOT KNOW! And then explained that she did not know what the losses on its $2 Trillion portfolio are.

   Now this supposedly is the "Go To Girl", with all the answers. That it her job, so to speak. So now ObamaBush wants to give the FED even more oversight powers when the Inspector General can't even find the keys to her car..

   We are in serious trouble here. And so is Obama. He is down in the polls as we speak. He is losing his base. The REAL left is already jumping ship. He has reneged on almost all campaign promises that are important. Though he occasionally throws a meatless bone to the left.

   Time to hit the streets. But we won't. Maybe we should look to people of Iran for a lesson in sacrifice and democracy. At least they know how to do it.

   Posted by chaoszen at 06/18/2009 @ 09:09am

8. There are only two possibilities that I can see for the FED chairman to not know the answers to where $9 Trillion Dollars went. One: She is lying. Two: She is a moron. I would bet on the former before the latter.

   The reasons for this? One: The Dead Corpse of our Economy is being sucked dry of the last remaining fluids left in it. In other words we are being ripped off, even after we were ripped off.

   Or Two: Same as number one.

   Posted by chaoszen at 06/18/2009 @ 09:33am

9. The FED makes up money out of thin air, right? Then they take the make believe money and distribute it to "certain corporations" who divy it up however they see fit to "certain people". Then the "nice folks" who got some of this make believe money spend it before anyone is the wiser on hard assets like real estate, precious metals and the like.

   Then when this ponzi scheme collapses like a house of cards, guess who is left holding the bag? I would hope you would know who..

   Posted by chaoszen at 06/18/2009 @ 09:45am

10. Then I'll be happy.

    Posted by JakobFabian at 06/18/2009 @ 07:54am

    Fat chance! You're a closed-brain Lib.....not programmed to be HAPPY.

    Posted by Happy at 06/18/2009 @ 09:48am

11. WAKE UP AMERICA! Please..

    Posted by chaoszen at 06/18/2009 @ 09:50am

12. Posted by Happy at 06/18/2009 @ 09:48am

    And YOU...are supposed to be???

    Posted by Mask at 06/18/2009 @ 11:22am

13. The elite insider robber barons who pretend to be either Republicans or Democrats are right now at this very moment selling your future and your childrens future for their own personal gain. If you don't see this, you are blind.

    When push comes to shove and our entire economic system collapses into ruin, these people will run away with your future. They will sit comfortably in whatever enclave they have established for themselves and laugh at how stupid you were and celebrate your misery. Then they will procede to enslave you in whatever manner they chose.

    Your children and your childrens children will do their bidding or starve. Would you willingly give your life for your childrens future? Or will you sit on your hands and let these monsters take from you everything that you hold dear.

    The decision is yours. The time to act is NOW. Do not let yourselves be lulled into a sense of security by soaring rhetoric and empty promises.

    We must act. And act now.

    Posted by chaoszen at 06/18/2009 @ 1:16pm

14. Anyone that was sitting on the fence on what the new regulations would be to avoid another economic financial meltdown got their answer... business as usual until the house burns down.. burn baby burn.. let the motha fer burn.

    Time to put your retirement funds under the matress because if it hurt to lose %40 percent last time .. then the next collapse will take the %60 percent your left with of your retirement savings.

    Every man for themselves.

    Posted by oc2001 at 06/18/2009 @ 1:44pm

15. We must act. And act now.----Posted by chaoszen at 06/18/2009 @ 1:16pm

    Okay....how? And give DETAILS, not soaring rhetoric and empty promises.

    Posted by Mask at 06/18/2009 @ 2:57pm

16. "Okay....how? And give DETAILS, not soaring rhetoric and empty promises."

    Posted by Mask at 06/18/2009 @ 2:57pm

    That's exactly what I was going to say.

    "I'll be happy with some "Eisenhower" and not dream of some "Norman Thomas", as I think most of the general public will be."

    Posted by Mask at 06/17/2009 @ 3:06pm

    Eisenhower??

    He seemed to only be good at warning about, that which he helped to create. (MIC)

    Posted by Malcontent at 06/18/2009 @ 6:05pm

17. This is extremely complex territory. The modern world of credit, banking and finance is inevitably so. Seems to me, however, that complexity itself is more likely to benefit Wall Street, allow for future AIG / Lehman malignancies. Whittling away by corporate lobbyists of every line in the sand.

    Questions abound. Like - if bankruptcy judges aren't allowed to tell mortgage companies to re-set their mortgages, then are they allowed to find these companies who don't do so "voluntarily" in contempt of some new consumer fairness focus?

    'Consumer Financial Products Agency is not a substitute for giving consumers the power to organize themselves' - but are consumers disallowed from doing so? Of course not. So what does this mean? What sort of consumer input should be formalized that somehow would not be subject to corruption / lobbying problems?

    Billy Bob gets a donut --- all ya' need is a Working Whites Common Sense test. Get every true blue Hillary-McCain white all American patriot who gets goosebumps to 'God Bless the USA' and footage of Shock and Awe and doesn't know a Sunni from a Moonie to take a test.

    If they can't explain what a thing is, it's illegal.

    Interest rate swaps/ Interest rate caps and floors/ Interest rate options/ Forward rate agreements/Currency futures Foreign exchange options/ Outright forwards/ Foreign exchange swaps/ Currency swaps...

    Posted by winyahn at 06/18/2009 @ 8:50pm

18. oops, 'violation', not 'contempt'

    Posted by winyahn at 06/18/2009 @ 8:52pm

19. Okay....how? And give DETAILS, not soaring rhetoric and empty promises.

    Posted by Mask at 06/18/2009 @ 2:57pm

    I covered that in a previous post. But here it is again.

    Maybe we should look to people of Iran for a lesson in sacrifice and democracy. At least they know how to do it.

    Posted by chaoszen at 06/18/2009 @ 09:09am |

    Posted by chaoszen at 06/19/2009 @ 12:36am

20. "I covered that in a previous post. But here it is again.

    Maybe we should look to people of Iran for a lesson in sacrifice and democracy. At least they know how to do it. "

    Posted by chaoszen at 06/18/2009 @ 09:09am |

    Posted by chaoszen at 06/19/2009 @ 12:36am

    Mask was probably just being...well... mask.

    I personally found your rhetoric interesting. As I read your post, I was thinking, "You said it brother!"

    But here I am at the same point I always get to; Whataya gonna do? Walk like an Iranian? Become a muslim? Deny the holocaust?

    In other words, "we should look to people of Iran for a lesson" was a coherent answer?

    Maybe you could be a tiny bit more specific.

    Shoam mitooni ke komakam konid, Eric

    (How was that?) :o)

    Posted by Malcontent at 06/19/2009 @ 07:22am

21. Posted by chaoszen at 06/19/2009 @ 12:36am

    Yes, that's a LOT of details, chaos.

    "March in the streets"?....cool. Have you done ANYTHING to start organizing that?

    Something else???

    Posted by Mask at 06/19/2009 @ 08:07am

22. Posted by Malcontent at 06/18/2009 @ 6:05pm

    Look further into Ike, Eric.

    Here's a hint...Larry/antisoc ranks him "as bad" as Roosevelt or Truman.

    Posted by Mask at 06/19/2009 @ 08:10am

23. Look further into Ike, Eric.

    Here's a hint...Larry/antisoc ranks him "as bad" as Roosevelt or Truman.

    Posted by Mask at 06/19/2009 @ 08:10am

    Wrong.

    I rank Truman ahead of Ike and Ike as average/mediocre. Nowhere near the bottom where FDR is.

    Posted by antisocialist at 06/19/2009 @ 10:53am

24. Posted by antisocialist at 06/19/2009 @ 10:53am

    You DO realize that Truman proposed the first universal health care plan in 1948, right?

    Oh and he fired MacArthur?

    Posted by Mask at 06/19/2009 @ 11:09am

25. You DO realize that Truman proposed the first universal health care plan in 1948, right?

    Oh and he fired MacArthur?

    Posted by Mask at 06/19/2009 @ 11:09am

    Yes, and as I've repeatedly stated, there never has been a perfect president. I judge them on their overall performance with the priorities on national defense, taxes, and adherence to Constitutional principles.

    I did not say that I put Truman in the top 10. But I do rank him above average.

    Posted by antisocialist at 06/19/2009 @ 11:41am

26. Posted by antisocialist at 06/19/2009 @ 11:41am

    Okay, well given Truman didn't cut taxes....proposed more "un-Constitutional" domestic spending...fired Douglas MacArthur DURING the Korean War....and also didn't use nuclear weapons on the Chinese as you want...

    what endears him to you, exactly?

    Posted by Mask at 06/19/2009 @ 1:52pm

27. Okay, well given Truman didn't cut taxes....proposed more "un-Constitutional" domestic spending...fired Douglas MacArthur DURING the Korean War....and also didn't use nuclear weapons on the Chinese as you want...

    Posted by Mask at 06/19/2009 @ 1:52pm

    Your facts are distorted. He finished off WWII strongly; he understood the threat of communism including N Korea and quickly committed the US to that theater of action.

    <Truman was under the impression that nothing but brute force would stop the Soviets. Because of this, he began to pursue a military policy, along with his economic or political policies, to contain the Soviets. Indeed, after 1950, containment was, for the most part, militarily.

    Clearly, the Truman administration had to pursue a strategy of military containment.

    However, internal politics dictated quite the opposite strategy. The republican leadership in both the Senate and the House was committed to fulfill their campaign promises of a 20% reduction of income taxes. At this point, Truman had to convince both the Senate and the American people how pressing the international situation was, and how important it was to pursue these expensive policies of containment. This led to the Truman Doctrine, in March 1947. Eventually, Truman was able to pursue a perimeter defense containment strategy -- a more singular, coherent, easy-to-swallow policy -- to persuade Congress and the populous of the pressing threat of the Soviets. Kennan had warned against framing a rigid policy towards the USSR because he believed that transforming expertise into policy guidelines distorted the expertise: "It was misleading to assume it possible to describe in a few pages a program designed to achieve US objectives with respect to the USSR.">

    continued

    Posted by antisocialist at 06/19/2009 @ 2:40pm

28. Mask-Truman cont.

    <But Truman had to. He needed to appeal to the masses, and like all leaders of democracies, he was shackled to public opinion. However, Truman (and his eloquent Secretary of State) ultimately led Congress and the populous to adapt his point of view and, unlike the Eisenhower administration, was not led by them. It must be said, though, that Truman was not totally unmoved by domestic politics, especially the need to cap spending. Regardless, under NSC-68 he increased military spending to $45-50 bill. a year. The perceived threat by the Soviets led Truman to pursue this strategy which he rightly considered essential. Clearly, any president in Truman's situation would have pursued the same policies of military containment because it was the only option made available to him.

    The Truman administration was more concerned with Stalin's expansionist tendencies, and sought to contain him by the best means possible, which he considered to be conventional warfare. Truman used rhetoric and threat to sell his policy to Congress and the American people, because his policy was expensive. Eisenhower, on the other hand, was more concerned with his popularity and cutting taxes than pursuing expensive overseas militaries. He was able to cut costs by using nuclear capabilities as a deterrent against the Soviets. Thus, he used a more capital-intensive, and less labor-intensive means to detract Soviet expansion. Because he was able to cut costs so effectively, it was not as important for him to sell him policy to the public. That is namely why Eisenhower was such a popular president.>

    http://www.indyflicks.com/danielle/papers/paper04.htm

    So my support for Truman as better than Ike is that I always put Nat'l Security over domestic issues.

    Posted by antisocialist at 06/19/2009 @ 2:45pm

29. More Truman

    <After the conclusion of World War II, defense spending fell dramatically. While taxes were lowered slightly, the huge fall in spending led to surpluses by 1947. By 1948, the defense demobilization was essentially complete, and the Nation ran a healthy surplus of nearly $12 billion - well over 4 percent of GDP, the biggest surplus of modern times. Yet within a year, it was all but gone. Why?

    The overwhelming reason for the vanishing surplus was an increase in federal outlays of over 30 percent in a single year. Over 60 percent of the increase in spending related to national security and foreign affairs. The heating up of the Cold War after the Berlin Crisis of 1948 no doubt contributed to this. Military budgets were increased considerably, and foreign aid spending soared with the beginning of the Marshall Plan. The $9 billion spending increase dwarfed the $2.2 billion in tax reductions arising from changes in individual income taxation (e.g., the introduction of the joint return).>

    http://tinyurl.com/kjqnxz

    So we see that over 60% of the increase in spending under Truman was due to increased defense spending.

    Posted by antisocialist at 06/19/2009 @ 2:50pm

30. So my support for Truman as better than Ike is that I always put Nat'l Security over domestic issues.

    Posted by antisocialist at 06/19/2009 @ 2:45pm

    Isn't National Security ultimately a Domestic Issue? Since the people, in theory are the government and elect officials to represent them and do the peoples business. But you would not see any evidence of that since 76% of the American People want a single payer healthcare system and most Americans want to see and end to the "wars" in Iraq and Afghanistan.

    The American people should be the ones who decide these issues. Not the crooked politicians and the greed mongering corporations who own them.

    Unfortunately we live in a Fascist Country at the moment and the American People are to chickenshit to do anything about it.

    Posted by chaoszen at 06/20/2009 @ 08:45am