Jun 17, 2009
The Federal Reserve took a lot of flak from lawmakers when it failed in its oversight responsibilities and the financial crisis occurred. Now, it seems that the Obama administration is planning to remedy this situation by endowing the agency with the authority to oversee systematic risk. If this plan passes Congress, it will usher in the Fed’s biggest reform in decades. At the same time, the Federal Reserve’s emergency lending capabilities will be limited.
The proposed financial regulation will require the central bank to get written consent from the Treasury before it can give emergency bailout funds. In addition, Obama wants a comprehensive review on how the agency regulates financial companies. In essence, the move is a proposal that aims to prevent regulatory loopholes that result to risk build-up. However, a significant part of the plan requires the approval of Congress where ideological clashes will likely occur. Despite this, the president wants to sign the bill at the end of this year.
Everything from mortgage lending practices to investment strategies will be affected in the government’s across-the-board effort to stop reckless decision-making that helped spark the economic crisis. According to Obama, “we have to have somebody who is responsible for seeing the risk of the system as whole and not just individual institutions.” He added that the “Fed is best positioned to do that”.
Essentially, the plan will overhaul the outdated financial system and make way for fundamental changes. Instead of using a “bulldozer” to clear the path to reforms, senior government officials likened the reforms as restructuring an existing system. It can be likened to an architect’s blueprint for improving an old structure.
Obama’s 85-page white paper outlines the reason why the economic crisis occurred and gave proposals on how these loopholes can be plugged. Among the most notable reasons include the yawning gaps in regulation that allowed banks to lend to borrowers that cannot afford it. Funding these loans can from exotic investments that regulators poorly understood. In addition, problems with executive compensation were also tackled.
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