Will Obama's Financial Overhaul Bring Real Change?

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President Obama is expected to announce next week his plan to overhaul the nation's dysfunctional financial system. One financial expert predicts tweaking, rather than sweeping change, this year in the face of strong opposition from the financial sector. iStockphoto.com hide caption

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With President Obama expected to announce next week his plan to revamp regulation of the nation's dysfunctional financial system, speculation about what he'll recommend has been running rampant.

But what already appears clear is that the president plans to pull back on some of the more ambitious proposals that his administration had floated on Capitol Hill, from consolidating four bank-and-savings regulatory agencies into one uber-overseer to merging two agencies that oversee financial markets.

Obama himself has said little about specific proposals, though reports suggest that he'll promote measures that would protect consumers who buy financial products and make it easier for the government to liquidate troubled financial firms.

But in an economic speech he gave as a candidate last year at Cooper Union in New York City, Obama outlined what he characterized as six principles necessary for reform:

1. Provide the Federal Reserve with supervisory authority over financial institutions that turn to the central bank as lender of last resort.

2. Strengthen capital, liquidity and disclosure requirements for all institutions.

3. Streamline overlapping and competing regulatory agencies like the Securities and Exchange Commission, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission.

4. Regulate financial institutions for "what they do, rather than who they are" — meaning that nonbank mortgage brokers and companies, key players in the subprime mortgage debacle, should be regulated like banks.

5. Crack down on market manipulation, including rumormongering by traders who subsequently make market bets based on the effects.

6. Create a financial market oversight commission, reporting the president, his financial working group and Congress, to identify and monitor threats and risks to the financial system.

To assess what's at stake for the president — and the country — as it awaits the White House overhaul, NPR.org spoke with Simon Johnson, the Ronald A. Kurz professor of entrepreneurship at the Massachusetts Institute of Technology's Sloan School of Management.

Johnson is a co-founder of BaselineScenario.com, a Web site on the global economy, and a member of the Congressional Budget Office's Panel of Economic Advisers.

Could you characterize the scope of what President Obama, while a candidate and in his early weeks in office, promised to do to overhaul how the nation's financial system is regulated?

Candidate Obama took the global financial crisis seriously and was quite clear that the underlying problems needed to be addressed. However, he was somewhat vague on specifics — probably wise, given the conditions of any presidential race.

What were the conditions that made his overhaul pledge so important?

In the run-up to the presidential election we faced a financial crisis of unprecedented intensity, and the government determined that some banks were "too big to fail" and therefore had to be supported at all costs.

Why have his goals — including a centralized power to oversee banks — proven more difficult to accomplish than he anticipated? What are the obstacles?

The administration's line is that Congress is not supportive, and they are only going to advance an agenda that has a good chance of passing. In reality, the financial sector and its various lobbies are once again strong enough to oppose any meaningful change. The real news is that the administration does not want to take on these financial lobbies. Why exactly they are ducking any confrontation is open to debate — particularly as these same lobbies helped get us into the crisis, for example, by opposing regulation of derivatives.

The president is starting to face significant criticism on the economic policy front. What does his game plan appear to be now? Does the fact that he looks to be stepping back from his more ambitious ideas mark an abandonment of overhaul, or simply a politically realistic ratcheting down?

Most of the president's economic policies make sense, and his fiscal stimulus push has helped stabilize financial markets. The overly easy approach to banks probably appeals to Treasury as a way to get the economy going again — but it is storing up serious problems for the future.

His original aims for regulatory change seemed targeted at streamlining the process. But do some of the proposals reported to be under discussion, including adding new overseeing bodies to the existing structure, add more red tape?

I'm not sure we see exactly the contours of what will go to Congress, and we certainly don't know what will emerge in terms of legislation. Regulation needs to get tougher — you can call that red tape if you like, or you can call it effective control over excesses, but if we don't get movement in this direction, we will have ignored the powerful and scary wake-up call from fall 2008.

How will this week's announcement that 10 banks plan to pay back money they received through the bank bailout plan affect the president's ability to accomplish meaningful overhaul?

As far as we can see, it's back to "business as usual" for those banks. Any notion of meaningful and lasting change in their behavior appears to have been jettisoned, despite the massive costs this society has incurred due to their incompetence and arrogance.

At this point, what do you reasonably see — and reasonably means, of course, given political and Wall Street realities — as the best outcome for the president's overhaul efforts, the best thing that could come from it from the perspective of the American taxpayer?

It's never too late to pursue a meaningful reform agenda. I don't think real change will come this year — my expectation is that most of the "reforms" will be technocratic tweaking with not real content. But the debate is now started and the banks are being watched more closely by civil society and outside experts. Most likely they won't be able to effectively control their own behavior and this will feed into broader demands for sensible change. Hopefully, this president will lead when that day comes.

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