3 ways Obama’s financial reforms could help you
OPINION - The president's proposal is an aggressive attempt to put oversight mechanisms in place to prevent another financial crisis ...
This week marked the first anniversary of Lehman Brothers’ collapse and the largest bankruptcy in U.S. history. President Obama used the occasion to shift the spotlight from health care reform to financial regulatory reform. In his speech Monday, the president highlighted his plan for what he called “the most ambitious overhaul of the financial system since the Great Depression.” Although the impetus for this plan originated on Wall Street, its impact will affect millions on Main Street.
Here’s how the plan could impact you:
1. More protection for the little guy.
The president’s plan proposes the creation of a new Consumer Financial Protection Agency (CFPA), which would be responsible for ensuring that mortgages, credit cards, and similar products are easier to understand and have fewer unfair or unsafe terms. This could be a huge win for disenfranchised communities who found themselves victims of predatory lending practices during the most recent real estate bubble.
CFPA would call for companies to provide transparency in disclosures, simplicity in pricing and products, and increased access to under-served consumers to prudent financial services, lending, and investments. This all sounds great in theory, but the devil is in the details and those are still being flushed out. The proposal will face an uphill battle on the Hill, given the well-funded bank lobby that is opposing the concept tooth and nail. Ultimately, it is likely that the political momentum that got Obama elected will result in some form of the proposed agency being formed resulting in greater consumer protection for the Average Joe. If the new “Debtor’s Revolt” launched via social media on Monday grows any legs, change could come about much sooner.
2. More oversight and power over the big guys
Obama’s plan would beef up the regulatory system so that it looks more closely at systemic risk to our economy (such as bubbles) and empowers the federal government to take greater authority over financial institutions, especially those deemed “too big to fail” like AIG once was.
Currently, the Fed’s relatively weak regulatory powers prevent them from stepping in earlier to prevent large, interconnected and highly leveraged companies from posing harm to the broader economy. In the case of AIG, this left the federal government with few options other than a bail out.
Executive compensation at banks will also be under regulator oversight. While opponents of the plan raise issues about the cost and inefficiencies of increased regulation, and the risk of too much government interference in free markets, there is no question that our current regulatory system is antiquated and needs to be revamped to meet the challenges and complexity of today’s financial markets.
There are still a lot of details to be worked, but if the government can pull it off successfully, in the long run, it could mean less systemic risk, greater transparency and more money allocated to issues like education and healthcare – rather than corporate bailouts.
3. More money in the bank backing your assets
Under the proposed plan, banks will be required to set aside more capital for a rainy day to cover things like high-risk loans. This will increase the actual and perceived stability of banks and give consumers more confidence that their money is safe, thereby preventing runs on banks. The reality, however, is that banks make money by lending to customers. Some argue that increasing the capital requirements may result in fewer loans and lower yields on deposit accounts. Ultimately however, the costs should be outweighed by the greater protection that is clearly needed.
All in all, the president’s proposal is an aggressive attempt to put oversight mechanisms in place to prevent another financial crisis and to protect consumers and investors from financial abuse, all while balancing the need not to overly interfere with free markets. Passing the various elements of his proposal will require a very delicate acrobatic act, which we should all watch closely.
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