By Jeff Harding.
Welcome to the New Deal v. 2.0. President Obama, as expected, said today that we are entering into a new regulatory phase of financial markets. Readers of The Daily Capitalist already knew this was coming back in August of 2008. I called it the Financial Risk Commission, but its official name will be the Consumer Financial Protection Agency.
I think Obama is the new Great Communicator. He has a way of putting things that seem so reasonable. Who could object to “common sense rules?” Sometimes his professorial tone falls flat, as it did with his Wall Street audience today, but his pitch wasn’t to them but to the American people. “The old ways that led to this crisis cannot stand.” As we know the “old days and old ways” are always bad (unless we’re talking about our parents and our childhood), and these new very reasonable “rules of the road” must be good.
This new Consumer Financial Protection Agency legislation will do three things. First it will establish “common sense rules” to prevent this economic crisis from reoccurring. Don’t ask me what this means since it wasn’t spelled out other than “we ought to set clear rules of the road that promote transparency and accountability.” Just expect harsher regulations and capital requirements so that capitalists don’t cheat us again.
Second, this new agency will apparently be similar to the Department of Homeland Security in that it will oversee the various regulatory agencies and “rationalize” regulatory oversight so that this one agency will be responsible for guarding against financial risk. There will be no more regulation “shopping” by those firms able to choose less invasive regulators. All financial companies will be subject to the new rules, but harsher rules will apply to the “too big to fail” companies that threaten “systemic risk.” Hedge funds will be regulated under these rules. They will also set up a “resolution authority” that will have the power to liquidate non-bank failed firms. This is done to “put an end to the idea that some firms are ‘too big to fail.’” Do you hear that AIG and Citigroup?
Lastly, there will be no place for capitalists to run as we coordinate these new financial regulations internationally. There are already new Basel rules coming out that increase bank capital requirements, for example.
I would expect that there will be another “czar” appointed to head this new agency. This Financial Czar will be given extraordinary powers by this new legislation, effectively allowing him/her to create new rules and regulations that extend the powers of the new agency to all phases of financial activity. Perhaps it will be Barney Frank? Janet Yellen? Richard Fuld?
In March of this year, I wrote a follow-up piece to my original article on financial risk regulation, in which I outline the possible areas of new regulation, and it is pretty accurate. I suggest you read it to get a good perspective on this. I pointed out that innovation in the financial markets will just move to other centers of finance where the reach of the G20 may not be as powerful – Mumbai, Dubai, Shanghai, and Singapore.
Don’t expect systemic risk to go away, since they don’t really understand that they are the major cause of it.
Before I forget, I wish to remind you that President Obama says he has “always been a strong believer in the power of the free market.”