Financial regulation is crucial to repairing what has gone wrong in our economy. While the Obama administration has made some significant proposals for overseeing risk-taking and regulating more sectors of the financial marketplace, the Congressional battle has yet to begin.
The topic of financial regulation is again a news headline as the world leaders gathered in Pittsburgh, Pennsylvania for the G20 summit. European leaders such as Germany’s Angela Merkel had high expectations on the issue: “Every financial market product, every institution, and every financial marketplace should be subject to regulation, and as a whole it must be a coherent move internationally.” As the Spring summit in London, in the midst of financial fright, nearly every leader spoke aggressively about such regulation with France’s Sarkozy hailing, "The time of banking secrecy is over." President Obama promised strong reform in the United States, saying "we agreed to increased transparency and capital protections for financial institutions. We're extending supervision to all systemically important institutions, markets and products, including hedge funds. We'll identify jurisdictions that fail to cooperate, including tax havens, and take action to defend our financial system.”
Six months later, in the United States at least, the path towards regulation is much less uncertain. The Treasury Department under the Direction of Treasury Secretary Timothy Geithner has proposed greater focus on systemic risk and enlarging the scope of regulatory authority into previously unregulated marketplaces. However, some critics of the handling of the financial crisis believe government intervention such as saving Bear Sterns, the auto companies, A.I.G. and the banks, only encourages more risky behavior for entities that are too-big-to-fail. Moreover, Congress will be required to pass any new proposals into law, and financial industry interests are well-represented in Congress.
The U.S. system is currently so complicated, with so many different financial instruments and organizations involved, that nothing will occur quickly. President Obama and some in the U.S. government have criticized banks and sought to harness the public anger against bailouts and the financial institutions to support regulation, including restrictions on executive compensation. However, Secretary Geithner has reportedly stood against those efforts. Geithner believes that the financial industry is the backbone of the economic recovery and that attacks on financial opportunities for the industry could sabotage the still fragile recovery. In this view, a healthy and profitable banking system will be able to adjust to new regulations, where a weak system might not.
