President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide

At 12:30pm on Wednesday at the White House (someone: please update the Treasury’s schedule of events), President Obama is due to “unveil” his proposals for reforming the functioning of our financial system.  The content has already been foreshadowed in some detail, most notably by the Geithner-Summers op ed in the Washington Post on Monday, but what the President himself stresses is still important – everyone who matters for the reform of financial regulation will be in attendance and his remarks (and perhaps those of Secretary Geithner) can absolutely set the tone of the debate.

In particular, the implicit story the President tells will frame our collective discussions going forward and – on some points – could even help tip the balance against established lobbies.

There are at least 10 important questions the President may address or shy away from tomorrow.  Add your own suggestions below.

  1. Does President Obama buy the idea that what happened to our financial system was a “rare accident,” or does he think that something more systematic has gone wrong?
  2. Does he think that the crisis itself will take care of many problems – for example by chastening the remaining bankers to behave well indefinitely or somehow making their organizations less stupid?  Or does the crisis serve just as a wake-up call to all of us: Unless and until we fix the system, we will be vulnerable to further damaging crises?
  3. Does the President realize and stress sufficiently the damage that has been done by bankers, for example as seen in the increase in our national debt that arises directly from their malfeasance – from around 40% of GDP to 70% (administration estimate) or 75% (IMF yesterday) or above 80% (my view).  He needs to say clearly: This cannot happen again – we simply can’t afford another financial calamity on this scale.
  4. Does he state plainly and unequivocally that the way the financial system has been run – and continues to be run – has damaged the national interest of the United States and pushed millions of people, both here and around the world, closer to poverty?
  5. Most important, does the President stress the need to protect consumers from the financial industry going forward, specifically with a strong Financial Products Safety Commission.  Messrs. Geithner and Summers seem, at best, lukewarm to this idea – in fact, we have no clear indication that they buy into the idea of consumer protection at all.  The President’s position on this issue will be decisive.
  6. If a bank or other financial institution is “too big to fail,” how exactly does the President plan to deal with it in the future?  Even if a wind-down can be managed by Treasury, with its new resolution authority (if granted), what will be the expected cost to the taxpayer?  If “too big to fail” is not in the President’s view “too big to exist,” kindly explain why not.
  7. Can the President bring himself to state in public the obvious: The extent of political influence in the hands of our financial system – large banks in particular, but small banks also in some instances – is out of control and dangerous?  Where is the administration’s reform agenda on this crucial point?  To those of us who frequent Capitol Hill, it looks very much like business as usual, albeit with higher political market share for the big banks that remain in business.
  8. Has the President really been briefed on the supposed benefits of having large financial institutions with great economic power and pervasive political influence?  Don’t just claim that these are a good thing – tell us, in detail and preferably with numbers, what we the public gain from the presence of these behemoths among us.  Keep in mind that “everyone has them” is no kind of argument – something so manifestly dangerous is not to be blindly copied.
  9. Why was executive and other compensation so notably absent from the latest Geithner-Summers joint statement of our problems and likely solutions?  Does the President really expect us to believe that any set of reforms will work if they do not directly constrain the amounts that can be earned from misunderstanding risk today and hoping that the consequences do not appear on your watch?  Does he have any idea of how the people who run big financial firms will game whatever controls try to limit their risk-taking?
  10. Can President Obama finally talk about the much broader break down of corporate governance in this country, with boards of directors serving no discernible purpose in terms of limiting the excesses of corporate executives in the financial sector but also more broadly?  Surely, without a reform package that includes measures to address this core issue, we will get exactly nowhere.

Update: Also see my latest video blog on the topic at The New Republic.

Update: Typo fixed in point #6; thanks “oliver” for catching this in your comment.

By Simon Johnson

44 thoughts on “President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide

  1. I think you need another “to” in “too big exist” in #6 above. Destroy this message upon reciept! Keep up the good work. This is the most informative site on the net.

  2. Have no fear- this crisis is too good to waste for the hallowed Obama team. Great new gobs of government coercion and regulation are forthcoming. We must regulate every nook and cranny of the economy and our daily lives, lest people start to think for themselves. We must douse those cries of freedom, for who knows, the people might start creating and the economy might actually grow- a scary thought indeed!

    Our hallowed Savior is all about political influence though. Just ask the crazy Chrysler bondholders, and those other right wing extremists/ wingnuts out there who dared to defy the One. We must stamp out their pernicious evil influence wherever we find it.

    Be patient. The Savior is busy anointing health care and the energy industries with his awesome gifts at the moment. The time for more financial regulation will come soon enough. Obama be praised!

  3. Paul–

    I’m not sure the Christian analogy is very useful. A late 20th century Marxist approach might be more helpful–the correlation of forces required for a revolutionary transformation of the financial services sector has not yet developed, but the internal contradictions of the capitalist system assure their eventual arrival, and current trends suggest that will occur sooner rather than later.

    More generally, as the Krugman Ferguson brouhaha suggests, historical analogies are tricky things and rarely get the respect they deserve, since they don’t lend themselves to quantitative rigor or testing. But if you don’t pay attention, you end up with a saddle on a dinosaur.

  4. I’ve just looked at the websites of the NYTimes and Washington Post. This regulatory reforms announcement is nowhere to be found on the fist page. It’s all about the Iranian election.

    The issue of financial regulation is already falling out from public awareness thanks to our trusted media.

  5. The sense of the analysis itself nothwithstanding, isn’t it just paralysingly naive for someone in Johnson’s position to ask if Obama is aware of or fully comprending of these points? During the great purge trials in the Soviet Union in the period 1936-39 there was a persistent belief among those victimized that if Stalin only knew what was happening to them that things would be very different. Other than the fact that, then, Communist Party operatives were largely the target and that, now, we citizen/taxpayers are, I see little difference, frankly.

  6. Yes, please leave the religious analogies out, unless you want some atheist to point out that the same post (with only minor revision) could be used to flame Christianity.
    Render to Caesar what is Caesar’s, etc.

  7. Comments on the points:

    1. I think the administration believes that the crisis is something that happened to the financial system, instead of something that the financial system did to itself. The focus has been on trying strengthen it from outside forces, but the enemy is within.

    2. I believe that Obama thinks we need to do something. And this will be something.

    3, 4, 5. One of the president’s great strengths has been to be able to communicate to the public the reasons for doing things that may be unpopular. These things are often unpopular because the public does not understand them. I’ve been disappointed in the president’s reluctance to try to explain these things better. People will listen to him in ways that they will not listen to Geithner. This is important enough for him to devote a half hour speech to. He should do this in prime time. This would also disarm many of the people who think he’s radical and dangerous.

    6. I believe this question has already been answered, as the banks have been allowed to return TARP. If they were interested in doing something about TBTF, they would have kept all the leverage they had.

    7. He’s running out of time to make these kind of statements. Every time you speak about the crisis and don’t say the obvious, the harder it gets later on. Let’s hope this is the time.

    9. I will be surprised if we get anything meaningful on compensation.

    10. I think that he realizes that the public’s eyes glaze over when people talk about corporate governance and boards of directors. But, again, he should find a way to make them pay attention.

    I would add that I am very curious as to whether Obama will mention that it is the philosophy of the administration to reduce complexity in the system. Here, I believe, is his best argument to the public:

    “I know that many of you find this system too complex to understand. My administration believes that this complexity is dangerous, as it makes it very difficult to regulate the system. Furthermore, we believe that, as long as taxpayers are being asked to pay for the mistakes of this industry, they should be able to understand how this industry is being run. Therefore, we are going to try to reduce the complexity, so that instead of having a system that tries to do everything, but does nothing well, we have a system that does the important things very well, and in a way that we can all understand.”

  8. I think Mr Muldoon summarized most effectively the slow decline in regulatory enthusiasm we have witnessed in the last 4 months. The President has decided to save his ammunition for a battle he feels is more important. He did not run on the issue of regulating the investment banks. He has other issues he pushed to the forefront. Summers and Geithner have no professional history of zealous reform of powerful institutions, they are not going to come to Jesus at this late hour.

  9. How about:

    “The crisis demonstrates the degree to which self-regulation functions to correct economic inbalances.”

    “Since inflation excludes volatile energy and food prices, and most Americans can only afford food and gasoline, we do not expect inflation to affect the vast majority of Americans.”

    “Hopelessness is not a plan.”

  10. I find it interesting that President Obama’s detractors characterize him as some kind of messiah while his supporters characterize him as a mere mortal. President Obama himself has admitted to making mistakes, something his predecessor was loath to do.

    Is there so little of substance to criticize that the right is forced to project a messianic complex that exists only in their minds?

  11. Maybe Obama might want to allay our concerms about the qualifications of his economic “Team” by mentioning some of their accomplishments, if any, in preventing financial meltdowns.

    Other than that announcing some personnel changes would be nice.

  12. When it comes to the important issues — the financial crisis, war, energy, climate change, health care — the Obama administration is looking like it just wants to sneak out of the room. The Democrats seem perfectly content to take the political spoils of their majority and let powerful neoconservative interests run the country by default, rather than by design.
    I feel like I’m watching a baseball game where the home team gives up a 10-0 lead in the first imming. (.\/.)

  13. Simon,

    A couple of months ago, you wrote this as point #1 in relation to Larry Summers’ thinking on the crisis:

    “All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.”

    Thankfully, you also noted the implicit contradiction in the statement. To me, that has and continues to be the best elucidation of the administration’s take on the crisis…basically reasoning that since this is a once in a generation kind of thing, pump crazy amounts of money into the banking sector until things stabilize…and then let things go back to how they were. Long story short, there will be some watered down customer protections announced tomorrow…the administration has already checked this one off their “to-do” list. On to healthcare reform!!!

  14. Simon, wonderful article as usual. Why not mention the fabulously erudite report issued on January 9 by the New Warren Commission (Congressional Oversight Panel) on re-regulation? It incorporates the ideas from most of the brightest, and comes up with a series of really wonderfully essential recommendations, which are clearly and logically supported.

    I have, unfortunately, come to the conclusion that the minimalist approach advocated by G & S will prevail, and that those are a result of “wonk capture” by the prevailing financial power structure. As has been pointed out, these guys are just too close to the forest to deal with the trees, and can see no clear path to think about real reform. Furthermore, it seems apparent that at some point in the next few months, and probably less than a year, with all that is agendized for Congress and the administration, and with the further deterioration in the economy, another crisis will arise, and both money a political will will be hard to find when this happens. The core weakness of the banking sector, combined with the continuing deterioration of the mark-to-whatever derivatives (toxic assets) and the fundamental weakness in credit and commercial real estate markets are going to provide a healthy backdrop to another secondary economic tsunami. What then? I’m quite concerned, and don’t even believe that even astute re-regulation can prevent this.

  15. I just had dinner with an old friend who is a carpenter who was recently laid off from his regular job.. To make ends meet, he has bid a job of hanging some mahogany doors in NJ for an executive at JP Morgan for half the going rate. The wife of the JP Morgan guy is complaining that instead of the regular $3 million they are used to, they might get only $300,000 under the new executive compensation regime. Their annual mortgage costs are $70,000. Needless to say, it doesn’t dawn on the wife that my friend is working half price against the alternative of zero. This is what the bankers’ gambling with other people’s money has brought us to.

  16. These points, and SJ’s, basically cover the issue.

    I would add one thing:

    We are heavy on details and are asking Obama for more details. We need them, but it would be nice to have him set out an overarching theme or narrative or something that people can relate to at a gut level.

    “Restoring the flow of credit” just doesn’t cut it. “Fixing our broken system” doesn’t cut it when the fix involves vast visible and invisible subsidies. Few people like the idea of fixing the system (not when the system is harming them and financial services are benefiting).

    My sense is that an enduring message should have something to do with the notion that we need to rebuild our “real” economy, and the purpose of financial services (as JK has noted in other posts) is to facilitate that activity. But I do not know how to encapsulate this thought.

    Indeed, I struggle to think of a single over-arching theme that encapsulates all of the excellent points raised by SJ and others like Muldoon. But I think it will be critical if Obama is to keep the public from forgetting quickly. I’m hoping he will articulate such a theme tomorrow.

  17. Obviously Stefan, you are a man of empathy and compassion. I can see the programming of Friedman, Reagan, and Gingrich has been wasted on you. Don’t you know that you should be ever so grateful, thankful, and appreciative to the JP Morgan executive for the “trickle down” he gave your friend??? Of course in these hard times, the JP Morgan executive has to drink smaller amounts of Cabernet Sauvignon, so after drinking the Cabernet Sauvignon he can’t “trickle down” as much as he used to.

  18. Sheesh, Stefan, how is a man supposed to live on less than three mill a year? That\’s Communism!

    I anticipate that the Obama speech will lay a goose egg with regard to addressing Simon\’s ten proposals.

    What we will hear are a lot of platitudes, some stern-sounding words but no names or figures. Result: some nice new jobs for the government/academia/wall street merry-go-round (if the new agency even gets off the ground), but no substantive changes.

    In a way, the interests of voters and Wall Street are aligned – both want a return to around 2005. Neither want to have to get a real job.

  19. Simon,
    Thank you for another informative article.

    There continues to be class warfare going on in this country with the corporate elites using their money and power to influence and control every department of our government.

    The U.S. Chamber of Commerce is launching a multimillion-dollar campaign to defend the free market system. Chamber President Tom Donohue proclaimed the campaign “one of the most important and necessary initiatives in our nearly 100-year history.” The campaign even has a title: “Campaign for Free Enterprise”.

    Press release:

    Here is the Chamber’s other website link to that announcement:

    We are getting a 3rd Bush term under Obama. There’s no difference between the Democrats or Republicans – they are two heads of the same body.

    I’m registered as an Independent. Until corporate campaign donations in this country are eliminated and/or the voters wise up and vote everyone out of office – literally – America will continue to decline and become more and more a corporate fascist country.

    Again, thank you for the good work you are doing Simon!

  20. 3 reasons why Obama’s ‘ reform” won’t work.

    1. Those implementing the reforms must be beyond reproach. Obama, and his team, with their almost daily suppression of free speech and their billions in payback to their cronies, the unions, ACORN, etc. are not those people.

    2. To implement reform, one must first impartially investigate and determine what went wrong. There has been no investigation of what went wrong, and there will be no impartial investigations coming because many of the culprits are in power.

    3. What we do know is that:

    • At the very least the CRA and Fannie/Freddie schemes lent trillions to those who couldn’t afford those loans and many of those people have defaulted.
    • The corruption at Fannie/Freddie spread throughout the financial system to the traders, investment bankers, banks, loan brokers and appraisers. To single out just the traders or investment bankers is just not credible.
    • Both parties are corruptly captured by Wall Street. This capture goes way beyond regulation – it also goes to our tax structure. That being said, the Democrats were behind the CRA/ Fannie /Freddie debacle , resisted all attempts to reform it, and are not to be trusted with reform.
    • Some of those touting a Consumer Financial Products Commission want to create another version of the CRA, another financial welfare program that will only make matters worse.

  21. Consensus over at Newdeal2.0 seems to be that the reform is hardly a reform at all. Point me to someone who thinks this is “sweeping”?

    Newdeal2.0 will have real-time response to the announcement from Robert Johnson, Marshall Auerback, Henry Liu, and other economy and financial sector experts…who had been hoping for real reform, too.

  22. Clearly they don’t have the important stuff even on the table for discussion and debate:

    Too big to exist they still act as if too big to fail is a given

    breaking up banks/brokerage etc something like Glass-St… is needed. the collusion between the arms of the same company is not only unethical but very destructive. GS upgrades WF, WF up grades MS, etc etc.

    GS sells california bonds (or whatever) then sends its brokerage arm to sell CDS after a downgrade..then trades CDSs…etc etc..what a joke!

    banks get taxpayer money then use it to jack up the markets while banks sell stock to raise needed capital…all very ‘legal’ of course.
    this is not even on the table. what BS.

    big is better…knocking out community banks and credit unions when only the bottom line is an indication of success..nothing aobut the health of cities and towns.

    fox guardingthe hen house still. what a joke!

    nothing of real substance is on the table or horizon. tinkering around the edges with feel good BS.

    read: David Korten’s small book Agenda for a new Economy, from Phantom wealth to real wealth…why wall street can’t be fixed and how to replace it….with main street interests finally in front.

    so, the conversation will continue around the edges and rotten core left fully in place.

  23. … what use is any of this if it is not a GLOBAL initiative?

    Wall Street/Main Steet FAT CATS will just park their moola somewhere else until the heat/dust settles …

    … In the meantime, ‘Credit’ is 100% ILLUSIONARY. Until America starts PRODUCING something, anything, again, it’s just one big finger in the dyke.

    … pity, btw, about U.S. Treasury bonds. That ‘unloading’ has just begun …

  24. It is no longer the right that is critical and I think ‘substance’ is the key word. Too bad there is none.

  25. Sorry I just do not trust Monday morning quarterback regulators to quarterbacki our future regulations. Some of those speaking about fundamental principles like the “too big to fail” issue, never uttered a word about it when it was truly needed.

    Also anyone not willing to face head on the stupidity of the current Basel regulations and foremost there the minimum capital requirements for banks and that so interfered with the risk allocation mechanisms of the market should perhaps not be trusted too much. You see the same way some could be too cozy with the bankers others could be too cozy with the regulators… and I honestly do not know what is more dangerous.

  26. I am very surpised by Obama’s timidity – the problem is not going away and when the next wave hits, it will be his wave, not his predecessor’s. He appears to be betting that there is no next wave. He needs to take a look at his hometown as the first wave is just breaking there.

  27. The Serious Pundits in Washington still have their jobs and pensions. They have moved on while the country has not. The banks are still too big to fail. Greed has not been significantly tempered by any of these proposals.

  28. “SOME SAY what happens in Iran may well be far more important than financial regulation”

  29. As a practical matter, I do not see how to “rebuild the economy” without reducing debt. And that will be painful. Obama is not about pain, except for the top 5%, allegedly. What he’s about is kicking the pain down the road.

    The latest figures I’ve read put total debt-to-GDP at 375%. I don’t believe this is sustainable. Obviously the credit markets are having doubts as well. “Restoring the flow of credit” — banks don’t want to lend and people/companies who are overleveraged can’t reasonably borrow. The US Gov’t is overleveraged, too. Until Washington wakes up to this reality, there is no way out.

  30. Simplicity is dangerous, too, when it concentrates power even more than it already is. The Fed and the Treasury have taken near-dictatorial actions in the past year. And we still don’t know what the Fed is up to with their reported $9 Trillion dollars of off-balance sheet transactions. A lot of what the Fed does is like a black box — shrouded in mystery. The money flows in and out. We are not allowed to know where and why.

    Why should we place any more power in the hands of an institution that was a large part of causing the problem? Oh yes, it is a simple fix. It’s also the dumbest thing to do, if you believe in accountability.

    Is anyone minding the store at the Fed?

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