Obama’s financial regulatory reform risky but necessary
I have a friend who broke both of his legs climbing a dangerous mountain in Southeast Asia. This friend has nearly died 8 times, been chased by bears, and has had food poisoning too many times to count. After his latest injury, we presumed that he would understand that taking such risk simply doesn’t pay. But he rebuffed our intervention, stating that the risk is what makes his life worth living. My friend seems to believe that pursuing and living the dream might be worth enduring the occasional nightmare.
The current financial crisis is certainly the worst of economic nightmares. Job losses have been enormous and the stock market has shrunk faster than Lindsay Lohan’s dress size. A report released by the Bureau of Labor Statistics last week reported that in May jobless rates were higher in all 50 states and in the District of Columbia than they were a year ago.
The Black community has had a double dose of economic drama, as our unemployment rate is nearly double that of White Americans, standing at 14.9% according to the latest figures from the Bureau of Labor Statistics. Black urban centers such as Detroit have been hit especially hard.
But what must be remembered is that overregulation during the bad times can keep our nation away from more of the good times that have allowed us to achieve unprecedented economic prosperity. What is also true, however, is that while driving a fast car gets you to your destination quickly, high speed crashes can be devastating. You must be sure you are safe.
I like Barack Obama’s most recent plan to regulate the financial system more effectively. Entitled Financial Regulatory Reform: A New Foundation the plan was released last week and aims to address some of the issues that have led to the current economic crisis. While the president leans farther to the left than I do, he has provided balanced and intelligent leadership while in office, doing the best he can with what he’s got.
The enormous deficits – expected to reach $1.84 trillion this year, a rise of $89 billion – are going to bite us hard for years, and I echo those who wish to remind President Obama of the necessity for targeted Black economic stimuli. But as it stands, President Obama’s plan does what it needs to do: put a tighter grip on large banks and protect consumers from financial predators. Those are two things that were missing during the tenure of the Bush Administration.
To be more specific, Obama’s plan forces banks to meet more stringent capital requirements and leverage restrictions, implying that they will be less likely to self-destruct. He also gives the Fed greater control over banks that are considered “too big to fail.” This is important, since many banks overplayed their hands during the booming economy. It’s not that these banks were woefully inefficient or that their managers were undeniably incompetent. It was that a poorly regulated environment which demands profit maximization is going to require you to push the envelope as far as your competitor.
Irresponsible behavior by financial institutions became even more alarming in light of shocking accusations of rampant predatory lending in the Black community. Wells Fargo, a huge sponsor of The State of the Black Union event, has been charged with massive exploitation of Black communities all around the country and is currently engaged in a lawsuit with the city of Baltimore and has also been named in a class-action lawsuit brought by the NAACP.
This is a direct call for the Obama Administration to hold individuals and organizations accountable for deceptive sponsorship schemes and “home ownership seminars” designed to lure in customers and sell them bad loans.
As part of his proposal, Obama wishes to streamline the regulatory process, reducing some of the redundancies and loopholes for banks. While I agree that this is a good idea in theory, the challenge is that it may not work very well in practice. After all, we are dealing with Washington politics, which is just as culpable in the creation of the crisis as the banks themselves. While banks were responsible for the massive challenges of our financial system, it will be DC politicians who are responsible for the long-term problems of the federal government’s irresponsible commitment to debt.
Finally, and most importantly, Obama wants consumers to be protected from the banks themselves. While I appreciate the fact that the president wants to create a special committee to protect consumers from deceptive banks, the best consumer protection is to arm Americans with an understanding of money. Financial literacy in America is kept artificially low and I have always argued that basic finance should be taught in every high school in America.
We live in a capitalist society, so it is almost conspiratorial that we are left deliberately uneducated about the monetary opiates to which we are encouraged to become addicted. This problem is especially true in the Black community, where wealth and income levels are far lower than those of White America.
President Obama should push for financial literacy for all Americans, as well as stronger consumer protections. These lessons on money should not come from seminars offered by banks, but rather, the lessons should come from those who have no incentive to sell unstable financial products. Corporate wolves will continue to prey on us if we keep behaving like defenseless sheep.
To some extent, by attempting to dodge the possibility of any significant economic downturn in the future, Obama is being asked to do the impossible. We’ve all heard the saying, “Nothing ventured, nothing gained.” The truth is that you cannot have the type of economic growth we’ve had in the US without an unforeseen challenge or two.
Financial models are very complicated, and many of these models (which provide powerful monetary advantages when they work well) have not encountered every scenario that could break them down.
Treasury Secretary Tim Geithner stated that, “It will be very hard, perhaps impossible, for any authority, any individual to anticipate and pre-empt all potential sources of future risk.” I agree with Tim. Nevertheless, for the African-American community and for all of America, Obama’s financial regulation plan is a welcome move.
