President Obama proposed sweeping regulatory change in the financial system yesterday. Some questions must be asked:
1. Does the proposal make the U.S. economy impervious to bubbles and busts?
2. Does it make capital markets run more efficiently so that the invisible hand can prevent market bubbles?
3. Does it take pressure off the taxpayer?
4. Does it prevent moral hazard?
The answer to all four is a resounding “no.” Obama simply has expanded the role of government into the marketplace, without protecting anyone.
This proposal will cost you money.
Recall that it was the financial industry’s reaction to government policy that created the bubble. The Federal Reserve left interest rates extremely low for too long a time, while the House Financial Services Committee and the Senate Banking Committee failed to supervise Fannie Mae and Freddie Mac. Other regulators in the U.S. government simply didn’t do their stated jobs. This financial panic sits at the foot of government, not at the foot of Wall Street. There are many targets for finger-pointing, but the seeds of the bubble were planted by federal policy.
Yet Obama’s proposal vastly expands the interference of government, increasing regulation of financial firms!
Recent stress tests gave the financial marketplace very little information as to the health of the firms. The standards set by the Treasury were so low, and in some cases so unrealistic, that the tests themselves were meaningless. Yet Obama proposes more stress tests at the government’s whim — creating anxiety for shareholders and more costs for the business.
He places a lot of power with the Federal Reserve to police the marketplace. The Fed doesn’t have the knowledge or firepower to accomplish this task, nor is it the proper role of the Fed as the policing creates too many conflicts of interest.
Obama looks to regulate hedge funds, private pools of capital that only the wealthiest investors can be a part of. Hedge funds are not like mutual funds and should be left alone.
Obama wishes to regulate bank compensation. This will restrict banks from bidding for the best and brightest personnel. Who would you rather deal with, the post office or FedEx?
Instead of privatizing Fannie and Freddie, Obama hands them to the Treasury and Housing and Urban Development. What will happen here? Fannie and Freddie will become public utilities, politically run, and then make political and populist loans. Another disaster waiting to happen.
With regard to financial markets, Obama does very little to alter the existing playing field. Instead, he presents vague verbiage to be interpreted at anyone’s whim: ” … strengthens laws to prevent ‘unsophisticated parties’ from trading derivatives.”