The US economy is experiencing
one of the worst financial crises
since the Great Depression. It all started with
the subprime mortgage crisis two years ago and then spread
to all other forms of debt. Estimates indicate that the total losses of the
US banks could reach as high as one-third of total
banks' capital. Thus, the financial crisis has led to a sharp decline in
bank lending and this has effected a severe recession in the economy. The root
cause for the financial mess lies in the current
system, which was imbued with weaknesses and jurisdictional overlaps,
and suffers from an outdated conception of financial risk. For instance,
investment banks which compete with mainstream banks were beyond company rules
and were able to take on more leverage. Similarly, insurance deposits owned
by insurance firms were out of the purview of bank regulations.
On the other hand, corporates were able to exploit their
organizational structure by choosing lenient regulators. Thus, the loopholes in the
financial regulatory regime influenced some organizations to take hasty
bets. The Obama administration's new regulations attempt to bridge these gaps.
With the proposed reforms, the US government is reassuring the Americans that the
financial system will be better controlled and is critical to the economic recovery.
The overhaul of the financial system is directed at better arming the
regulators to deal with the crisis. The new reforms take on some tough jobs, such
as forcing large financial firms to boost their capital cushions and
regulating over-the-counter derivatives, hedge funds and asset-backed
securities, where inadequate regulation triggered the financial crisis. They aimed to
avoid future crises in the form of tighter regulation of the biggest financial
institutions and a new framework for consumer and investor protection. One
of the populist measures of reforms includes the creation of Consumer
Financial Protection Agency (CFPA) to protect people from the extremes of
credit, savings and mortgage markets. Officials are of the view that their goal is
to make it less likely that the economy will ever again stagger on the brink
of collapse by giving policy makers more tools to arrest if any crisis occurs
the next time. After the New Deal in the 1930s, the proposed financial
regulation is the biggest push by delegating power to the Federal Reserve to
supervise any large financial institution which could threaten the financial
system as a whole. In a nutshell, it is a move to bestow more power on the
central bank to supervise and ultimately order the takeover of any financial
institution in trouble (the likes of Citigroup and Goldman Sachs). |
