Obama Adviser Urges More Rigorous Global Financial Regulation
http://www.truthout.org/011709E
New York - A top economic adviser to the incoming Obama
administration
unveiled a plan Thursday to radically rethink the global financial
system, including measures that would dramatically expand government
control over banking and investment in the United States.
The report - which recommends limiting the size of banks,
monitoring executive pay and regulating hedge funds - offers the
first
hint of the kind of change to the financial system that President-
elect Barack Obama may push for in coming months.
Obama has pledged to present a package of reforms to prevent
another round of the financial crisis that began in the United
States,
ahead of a summit of world leaders in London this April. Observers
saw
in Thursday's report potential building blocks of Obama's plan.
Although issued by the Group of 30 - an organization of international
economists and financial policymakers - its lead author is Paul
Volcker, the chairman of the Federal Reserve during the Carter and
Reagan administrations who will serve as a special adviser to the
Obama White House. Part of Volcker's role is to help mastermind what
could become the biggest overhaul of the U.S. financial system in
decades.
"I think this is a clear sign that the new administration is
going
to push for a major overhaul, for major structural reforms of the
regulatory system," said Steven Schrage, the Scholl Chair in
International Business at the Center for Strategic and International
Studies. "Having this highly esteemed group backing that proposal is
going to put pressure to present those changes before [the] April
summit."
The report's recommendations may find support among those in the
United States and Europe who have called for tighter regulation over
the financial system in the wake of the current economic crisis. But
elements of the plan were already opposed Thursday by some in the
financial industry, where some worry that the push for tighter
government regulation may go too far.
The report offered 18 recommendations that would insert
government
regulators into the boardrooms of financial institutions as never
before. The plan calls for vastly increased oversight of major banks,
going as far as to recommend the end of an era of mega banks whose
size makes their failure potentially catastrophic to the global
financial system. To limit their size and scope, banks, the document
states, should be prohibited from managing private-equity or hedge
funds. And deposits should not be concentrated in the hands of too
few
banks.
"Keep them small, so that any failure won't have systematic
importance," Volcker said at a news conference.
Money-market mutual funds that offer services similar to banks,
including dollar-for-dollar withdrawal at any time, should be
subjected to increased government oversight, the report said.
Currently, most do not operate that way. But those bank-like mutual
funds that want to avoid tighter regulation should sell relatively
safe financial instruments and clearly state to customers that the
value of their funds may or may not remain stable.
The proposal suggests that the U.S. government should clarify the
status of mortgage giants Fannie Mae and Freddie Mac, either making
them government agencies or regulating them as independent mortgage
brokers. Credit-rating agencies would also be subjected to greater
scrutiny.
Volcker said he would press the new administration to consider
the
measures, saying major changes are imperative because the financial
system is "broken."
"It's a four-letter word," he said. "It's a mess."
Elements of the plan - such as imposing regulation on hedge funds
- echo calls for closer supervision made by policymakers in the
United
States and abroad in past months. But Thursday's report was more
specific and aggressive in imposing government restrictions on the
financial system than a broad outline of changes agreed to by the
Bush
administration during a meeting of leaders representing the Group of
20 economic powers in Washington last November.
The Obama administration is expected to work closely with key
congressional leaders including Rep. Barney Frank (D-Mass) on
legislation that could restructure existing regulatory agencies and
impose new guidelines on U.S. financial institutions. The scope of
Volcker's proposal, analysts say, suggests that Obama's plan may
contain highly ambitious reforms.
Although financial industry officials concede that more
regulation
is likely needed to prevent a repeat of the current crisis, they also
said that some of the measures in the report appeared to go too far.
For instance, they opposed the suggestion that banks limit their
deposits and size.
"You want to apply the appropriate amount of regulation to
address
the concern that this kind of crisis never happens again," said Scott
Talbott, senior vice president of government affairs for Financial
Services Roundtable, which represents the largest financial
institutions in the United States. "But at the same time, you don't
want to stifle innovation, creativity or the allocation of resources
to take appropriate risks."
Although the report calls for global reform, it acknowledged
charges that flaws in the U.S. financial system were to blame for
starting the current global economic crisis. Thusly, it noted that
"several of the issues and recommendations have a direct U.S. focus."
The report renewed calls for greater international cooperation on
regulation, and new laws to oversee exotic financial derivatives,
made
during the November summit in Washington. With cautious support by
President Bush, plans are moving forward, for instance, to enhance
international cooperation in overseeing major banks through the
Financial Stability Forum in Switzerland. But European leaders have
eagerly awaited a signal from Obama on his ideas for new rules for
the
global financial system.
It is unclear how many of the recommendations will make their way
into Obama's final plan, but the report could lift the spirits of
Europeans who have called for tighter government oversight on
executives' pay and risk management in financial institutions - an
area where the Bush administration has offered tepid support. The
report urges the government to enforce systematic board reviews of
executive pay as well as new guidelines to measure the level of risk
a
firm is taking with exotic investments.
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