Obama Financial Regulation Plan: Empowering Regulators, Not Consumers

James Gattuso / June 17, 2009

After months of internal debate, President Obama today released his much-anticipated plan for reforming the nation’s financial regulatory system. The 85-page document is nothing if not comprehensive, containing a grab bag of changes covering almost every aspect of the troubled financial industry. Taken as a whole, the changes would trigger the largest increase in government intervention in the sector since the Great Depression, to the detriment of consumers. What’s worse, the proposed changes are unlikely to resolve the real problems facing the industry.

Among the key provisions of the plan:

* Systemic Regulation. The Fed, as advised by a newly-created “Council of Regulators,” would be charged with regulating “systemic risks” to the financial system. Yet, while the Fed’s power would be extensive — reaching even to private equity and venture capital firms — it is difficult or impossible to define or identify systemic risks before they appear (as argued by David John here).

* Consumer Regulator. A new “Consumer Financial Protection Agency” would be created to regulate mortgage lending, credit cards, and other forms of consumer finance. But while fraud and deception should be severely punished, few argue that fraud and deception had much to do with the current crisis. Worse, the proposed new agency is likely to limit consumer choice — by banning disfavored products — rather than increase it. In any case, existing agencies, such as the Federal Trade Commission, should be charged with this issue, rather than create a new regulatory bureaucracy. (more…)