Obama's Regulatory Reform: Our Money In Danger
On Wednesday, President Obama unveiled his new financial regulatory reform plan. The health of our financial system hangs in the balance. This is one of two commentaries about the new plan. Peter Morici thinks we're still in danger. Find out who thinks we're safer.
Peter Morici is a professor at the Smith School of Business at the University of Maryland, and the former chief economist at the U.S. International Trade Commission. Courtesy of Peter Morici hide caption
On Wednesday, President Obama rolled out a proposal for the most sweeping changes in financial market regulation since the New Deal, reaching every corner of banking and finance.
Obama's proposed reforms come on the heels of the federal government's billion-dollar bailout of Citigroup and AIG. And Obama has included in his proposed changes more regulatory power for the federal government over financial institutions. The idea is to give the federal government the power to head off risky investing before our biggest financial institutions reach the verge of collapse. The new regulatory powers would even give the government the ability to reorganize or flat-out sell portions of large companies whose outright failure would threaten financial market stability. Right now, the government is propping up big, failing firms with loans.
Thus upping the government's regulatory powers is supposed to ensure that taxpayers never have to bail out the banks again.
A noble goal. But it isn't going to work.
Here is the problem: Just as Citigroup and AIG are too big to fail, they are proving too big for regulators to effectively restructure. Selling assets and reorienting such large businesses in trouble, instead of letting them fail, is a Herculean task. Hercules, at least, had the advantage of being half-divine. Our government is run by mortals.
The unfortunate truth is that financial crises often occur because regulators fail to see the greatest threats until after the fact. In this most recent financial crisis, regulators knew lots of subprime mortgages were being written, and that banks were parking mortgage-backed securities in structured investment vehicles. But no one realized how much of a risk those practices posed to home values and the solvency of banks until lots of homeowners defaulted.
The only way to be sure of avoiding financial crises is by bestowing perfect foresight on government regulators. That's the stuff of fairy tales. Obama's new financial regulations reforms can't make him omnipotent, and Obama can't protect us from what he can't predict.