Viewer's Guide to President Obama's Wednesday Regulatory Reform Announcement

By Simon Johnson

At 12:30pm on Wednesday at the White House (someone: please update the Treasury’s schedule of events), President Obama is due to “unveil” his proposals for reforming the functioning of our financial system. The content has already been foreshadowed in some detail, most notably by the Geithner-Summers op ed in the Washington Post on Monday, but what the President himself stresses is still important – everyone who matters for the reform of financial regulation will be in attendance and his remarks (and perhaps those of Secretary Geithner) can absolutely set the tone of the debate.

In particular, the implicit story the President tells will frame our collective discussions going forward and – on some points – could even help tip the balance against established lobbies.

There are at least 10 important questions the President may address or shy away from tomorrow. Add your own suggestions below.

1. Does President Obama buy the idea that what happened to our financial system was a “rare accident,” or does he think that something more systematic has gone wrong?
2. Does he think that the crisis itself will take care of many problems – for example by chastening the remaining bankers to behave well indefinitely or somehow making their organizations less stupid? Or does the crisis serve just as a wake-up call to all of us: Unless and until we fix the system, we will be vulnerable to further damaging crises?
3. Does the President realize and stress sufficiently the damage that has been done by bankers, for example as seen in the increase in our national debt that arises directly from their malfeasance – from around 40% of GDP to 70% (administration estimate) or 75% (IMF yesterday) or above 80% (my view). He needs to say clearly: This cannot happen again – we simply can’t afford another financial calamity on this scale.
4. Does he state plainly and unequivocally that the way the financial system has been run – and continues to be run – has damaged the national interest of the United States and pushed millions of people, both here and around the world, closer to poverty?
5. Most important, does the President stress the need to protect consumers from the financial industry going forward, specifically with a strong Financial Products Safety Commission. Messrs. Geithner and Summers seem, at best, lukewarm to this idea – in fact, we have no clear indication that they buy into the idea of consumer protection at all. The President’s position on this issue will be decisive.
6. If a bank or other financial institution is “too big to fail,” how exactly does the President plan to deal with it in the future? Even if a wind-down can be managed by Treasury, with its new resolution authority (if granted), what will be the expected cost to the taxpayer? If “too big to fail” is not in the President’s view “too big to exist,” kindly explain why not.
7. Can the President bring himself to state in public the obvious: The extent of political influence in the hands of our financial system – large banks in particular, but small banks also in some instances – is out of control and dangerous? Where is the administration’s reform agenda on this crucial point? To those of us who frequent Capitol Hill, it looks very much like business as usual, albeit with higher political market share for the big banks that remain in business.
8. Has the President really been briefed on the supposed benefits of having large financial institutions with great economic power and pervasive political influence? Don’t just claim that these are a good thing – tell us, in detail and preferably with numbers, what we the public gaining from the presence of these behemoths among us. Keep in mind that “everyone has them” is no kind of argument – something so manifestly dangerous is not to be blindly copied.
9. Why was executive and other compensation so notably absent from the latest Geithner-Summers joint statement of our problems and likely solutions? Does the President really expect us to believe that any set of reforms will work if they do not directly constrain the amounts that can be earned from misunderstanding risk today and hoping that the consequences do not appear on your watch? Does he have any idea of how the people who run big financial firms will game whatever controls try to limit their risk-taking?
10. Can President Obama finally talk about the much broader breakdown of corporate governance in this country, with boards of directors serving no discernible purpose in terms of limiting the excesses of corporate executives in the financial sector but also more broadly? Surely, without a reform package that includes measures to address this core issue, we will get exactly nowhere.

Comments

[Leftfield:]

I agree on all succinct points made in the article. If all that were addressed satisfactorily we would finally begin a road that could possibly lead to future prosperity in the US for the many, not just the cronies.
The point of the damage done to our national debt to the tune of 40% rising to 80% courtesy of Wall St. needs to be repeated far and wide.
I await Obama finally rising to the occasion. Time and opportunity are passing.

Jun 16 11:19 AM

[Larry House:]

I think the Pres has made it clear that he thinks we have systemic problems. He wants to blame it on Bush as much as possible. His announcement may be a reason the market decides to decline. Does anyone think his new regulations will actually be good for business?

Jun 16 11:24 AM

[bobomite:]

11. Do you support HR 1207?

Jun 16 01:11 PM

[Steve in Gr...:]

Thanks, Mr. Johnson, for the interesting note.

However, what do you mean by the following question?

"Does the President realize ...the damage that has been done by bankers, for example as seen in the increase in our national debt that arises directly from their malfeasance...?

Bankers took the risks they did because they knew that the U.S. government would cover their losses. The increase in our national debt did not arise directly from bankers risk-taking. The increase in our national debt arose directly from incompetence by the U.S. government.

Scolding bankers (this must not happen again) will have exactly zero effect as long as the bankers know the government will cover their losses. The U.S. government is the big systemic risk.

Jun 16 02:02 PM

[Mad Hedge F...:]

Wste of time. Ho hum. Another day of financial reform debate. Another day of closing the barn door after the horses have bolted. Please stop scratching your fingernails on the chalkboard, will you? What has the market come to? The volatility index (VIX) spikes 7% in one day, and we only get a 187 point drop in the Dow. It’s getting so you can’t even get a decent crash going. Thank goodness I’m not a Master of the Universe anymore. Life in that industry is about to become incredibly boring.

Jun 16 02:10 PM

[Big Bubbette:]

Re-instate the Glass-Steagall Act and support HR 1207.

Jun 16 03:27 PM

[dcb:]

Mr. Johnson,
I applaud the fact that those who are in the know on these issues are attempting to get out to the public that the Obama administration is doing nothing in regards to reform. Unfortunately these messages need to by higher in the public debate. Without the pressure of the public there will be no reform.

I made the point in another post that Obama was chosen by the elites to represent change without really doing anything to upset the current structure. While this is hypothetical I think the overwhelming amount of evidence points to the case he will likely reform very little. We see summer and Geinter in the helm of power and these people are part of the cause of the crisis. The honest broker, Volker, has been marginalized.

I hate to say this because it is so not PC. But the establishemnt picked the anti bush, black with a muslim middle name, to be the voice of change yet accomplish nothing. He will be handsomely rewarded for his efforts I can assure you. I'm afraid it is all smoke and mirrors

Jun 16 05:11 PM

[machop:]

Does he realize how dangerous FED has become?

Jun 16 06:22 PM

[Speedspirit:]

What about the fact that when he ran for office it was America needed to change the policies of the last 8 years and what we got was a continuation. Bailouts for those who created the crisis. He went from getting rid of the statue of Churchill to kissing the ass of the queen in a short period of time. Went from all in for Healthcare to cut ,cut cut healthcare. Where are the jobs- bankrupt car companies with the really last source of manufacturing being left to turn to rust instead of re tooling and building equipment to repair and rebuild infrastucture like the electrical power grid, roads and bridges. Obama is a as@#$%^, period.

Jun 16 07:26 PM

[aa44aa:]

Please dont overanalyze Obama regulatory reform anouncement. It is nothing more than a sideshow. When everything is all said and done, it won't do one thing to those bankers. Afterall Obama is just a wall street puppet.

Jun 17 12:40 AM

[Windsun33:]

It is starting to look like the entire Obama financial reforms are nothing but a sideshow of smoke/mirrors and distraction. He is making the same mistake Clinton made, but worse, in pinning all his hopes and massive TV time on "health care reform".

In the end we will get something like the stimulous package - a pile of pork wrapped up in a gaudy package that does nothing but run up the deficet. Meanwhile economic reform is aimed at patching over 2009 problems with 1935 solutions (which did not work then either).

At this point I think about the best we can hope for is that Obama and congress don't do TOO much damage before the next election.

Jun 17 01:15 AM

[Umesh Patil:]

Polemical Economic Criticism

Let us face it, with a nonstop critic based on the core thesis of ‘uncontrollable political power’ of Wall Street Banks, Economist Simon Johnson is essentially becoming a critic like his another colleague at MIT – Noam Chomsky. Chomsky’s criticism of American Foreign Policy has been famous – famous for it’s exceptionally ‘lone worrier’ status among experts. Same seems to be Simon’s criticism of American Finance. For Simon and Roubini, everything comes back to the same root cause: inability of Washington to rein in Wall Street Banks or deficit spending. Most of the 10 points what Simon mentioned in this article, those are interlinked and essentially emerging from the same source (except may be the point of compensation).

Fact of the matter is there is no way we are going to get what Simon is asking in terms bank regulation. However Simon, Roubini and Krugman included too – all were wrong about Bank Nationalization. Not that Geithner had theoretically any superior plan of ‘stress tests’ or the criticism of this gang was invalid. It was a valid criticism as well as it was true that there were gaping holes in Geithner plans. But the reality is like business folks these policy makers have to do something, have to act and take the risk. Geithner took the risk and despite his poor ‘delivery’ managed to get the success (private funding to avoid Nationalization and hence to take tax payers off the hook). You can very well argue that this is a short term victory for Geithner and long term we are still in a problem. But that is why JJ Cramer criticizes Dr. Doom – it is always long term for him despite the fact that serially he is wrong in short term.

Look as Ezra Klein has explained on his blog, already the prospectus of any of these reforms materliazing is dim. This is due to the Congressional Legislative Calendar which is all tilted towards Health Care Reform. Next year when Finance Regulation Bills finally start moving through Congress how many of these ‘urges for reform’ are still going to be strong? Quite less. Add to that all the time made available for financial lobbyists to influence this reform package. Finally, the midterm elections by next year end will compel most of the Congress people to take money from these lobbyists. So where is the realistic chance to pass these reform bills in some stricter form? Why waste then ‘ink’ in criticizing it? President and Geithner have political jobs to do; so they will have to do this ‘salesmanship’. President and White House are good at it and in fact their Media Management skills in effect helped to create the ‘air of green shots’ which helped to raise private money for banks. So they are onto their own ‘political time table’ to organize such big media circus while releasing the regulation. Public and serious critics can afford to wait till actual bills ‘boil’ in Congress.

Truth is for next year or two, people will be quite alert in terms of financial bubbles and dangers. In absence of these reforms, general vigilance will help. It is all about the period in future after this initial alertness.

We need discourse about financial reforms keeping this context in mind. Otherwise, ‘single trick pony’ criticism hardly adds value to this discussion. Unfortunately, Simons is sounding like that, Dr. Roubini has been always so for quite long. At times, however, Krugman seems to show the openness to adapt and be flexible intellectually.

Can we be ‘polemical’ in Economics, that is the question? When Justin Fox’s book about intellectual history of Economics and theory of Stock Market is making waves, perils of ‘polemical economic doctrinism’ are well known. Fear is Simon is becoming a doctrinaire or an ideologue instead of being an intellectually curious and open economists who contributes to the discourse now and here.

Jun 17 02:53 AM

[Tony L.:]

Time to call a spade a spade.

After having thought about all the economic issues facing the U.S. and the proposed solutions to them I cannot help but think that the reasons why these solutions will fail sooner or later is because they don't address the fundamental causes.

In short, abolish the cartelizing privately owned central bank known as The Federal Reserve and as a result the country would be back on hard money otherwise known as a gold standard. From this there would be no easymoney credit booms that created these devastating boom bust cycles and the inability to socialize losses created by private instituions. Also without a central bank there would be no more injecting of the very poison (the printing of money causing inflation) that caused the sickness in the first place in the excuse of 'stimulating' the economy out of it's depression (not recession).

More regulation will just give more power to the very people who caused this - the bearucrats and the bankers.

Jun 17 08:07 AM

[dcb:]

even more people are starting to realize Obama is a load of smoke and mirrors. time for the press to start doing its job.

Is Obama Already a Lame Duck?
Jun 15, 2009 04:18pm EDT by John Carney in Healthcare Information, Newsmakers, Recession, Banking, Housing

Remember the days when Barack Obama was going to usher in a new era of hope and change in the nation’s capital? Ever wonder what happened to that plan?

Felix Salmon points out that despite Obama’s party running both houses of Congress, the president seems to be scaling back his agenda to please lawmakers. Democrats have stymied ambitious climate legislation. They’ve had a strong hand in undermining any far-reaching attempts to remake the financial regulatory structure. They’ve been mucking about in the auto-bailouts. And even Obama’s healthcare proposals may be in the process of being pared back.

Felix thinks all this is a bit mysterious:

How did Obama manage to spend all his political capital so quickly? Did it all go on the stimulus bill? Wasn’t the whole point of bringing Rahm in as chief of staff that he could work constructively with Congress to pass an ambitious agenda? And isn’t Obama himself the first president since JFK to have entered the White House from the Senate? I’m not sure when everything went wrong here, but I fear that the damage is now irreparable — and that Obama’s agenda is going to be severely scaled back as a result.

Our explanation is rather simple: Obama’s agenda was ambushed by the financial crisis, which forced him to spend the crucial early months of his presidency in pursuit of economic recovery and financial stability...

Jun 17 10:30 AM

[dcb:]

I disagree. Mr Johnson has great credentials and has the power to be considered a voice of reason. Krugman is considered a champion of the left so his voice always gets muted. In the popular press voices like mr. Johnson do not get heard.

According to statement Mr. Obama's staff made a crisis is a chance to get things done. Yet they aren't moving. Healthcare is a long term issue, while the chance for any meaningful financial reform has to be done while the iron is hot. Legislative priority should be financial right now, not health care.

As for nationalization or not I would have to say the jury is out. In fact I think it would have been much cheaper to nationalize. the Fed has destroyed it's balance sheet, we are printing money out of our ass, we have played with the yield curve which is gutting the dollar and cauuing future inflation, foreigners are less likely to hold dollars.

You think like somebody on wall street and not like someone who has to work for a living. To my friends who are just getting by the fed policies designed to help out the banks are a disaster to them.
when the dollar drops 15% against the Euro that is like 15% being removed from each and every savings account in the US, costs of fuel. We are paying a never ending subsidy to the banking industry to let them "earn" themselves out of this problem. We are paying for a "never ending subsidy" so bankers can still enjoy their bonus money.

My tax dollar has to be paid back at 4% to people who buy treasuries so banks can lend the money they get for free (from me) back to me at 6% (if I am lucky) Nationalization would be cheaper, faster, and cause much less economic hardship. what is going on is the biggest Ponzi scheme in american history, the biggest tax giveaway, and these people have done more damage to the US than Osama BinLaden ever did.


On Jun 17 02:53 AM Umesh Patil wrote:

> Polemical Economic Criticism
>
> Let us face it, with a nonstop critic based on the core thesis of
> ‘uncontrollable political power’ of Wall Street Banks, Economist
> Simon Johnson is essentially becoming a critic like his another colleague
> at MIT – Noam Chomsky. Chomsky’s criticism of American Foreign Policy
> has been famous – famous for it’s exceptionally ‘lone worrier’ status
> among experts. Same seems to be Simon’s criticism of American Finance.
> For Simon and Roubini, everything comes back to the same root cause:
> inability of Washington to rein in Wall Street Banks or deficit spending.
> Most of the 10 points what Simon mentioned in this article, those
> are interlinked and essentially emerging from the same source (except
> may be the point of compensation).
>
> Fact of the matter is there is no way we are going to get what Simon
> is asking in terms bank regulation. However Simon, Roubini and Krugman
> included too – all were wrong about Bank Nationalization. Not that
> Geithner had theoretically any superior plan of ‘stress tests’ or
> the criticism of this gang was invalid. It was a valid criticism
> as well as it was true that there were gaping holes in Geithner plans.
> But the reality is like business folks these policy makers have to
> do something, have to act and take the risk. Geithner took the risk
> and despite his poor ‘delivery’ managed to get the success (private
> funding to avoid Nationalization and hence to take tax payers off
> the hook). You can very well argue that this is a short term victory
> for Geithner and long term we are still in a problem. But that is
> why JJ Cramer criticizes Dr. Doom – it is always long term for him
> despite the fact that serially he is wrong in short term.
>
> Look as Ezra Klein has explained on his blog, already the prospectus
> of any of these reforms materliazing is dim. This is due to the Congressional
> Legislative Calendar which is all tilted towards Health Care Reform.
> Next year when Finance Regulation Bills finally start moving through
> Congress how many of these ‘urges for reform’ are still going to
> be strong? Quite less. Add to that all the time made available for
> financial lobbyists to influence this reform package. Finally, the
> midterm elections by next year end will compel most of the Congress
> people to take money from these lobbyists. So where is the realistic
> chance to pass these reform bills in some stricter form? Why waste
> then ‘ink’ in criticizing it? President and Geithner have political
> jobs to do; so they will have to do this ‘salesmanship’. President
> and White House are good at it and in fact their Media Management
> skills in effect helped to create the ‘air of green shots’ which
> helped to raise private money for banks. So they are onto their own
> ‘political time table’ to organize such big media circus while releasing
> the regulation. Public and serious critics can afford to wait till
> actual bills ‘boil’ in Congress.
>
> Truth is for next year or two, people will be quite alert in terms
> of financial bubbles and dangers. In absence of these reforms, general
> vigilance will help. It is all about the period in future after this
> initial alertness.
>
> We need discourse about financial reforms keeping this context in
> mind. Otherwise, ‘single trick pony’ criticism hardly adds value
> to this discussion. Unfortunately, Simons is sounding like that,
> Dr. Roubini has been always so for quite long. At times, however,
> Krugman seems to show the openness to adapt and be flexible intellectually.
>
>
> Can we be ‘polemical’ in Economics, that is the question? When Justin
> Fox’s book about intellectual history of Economics and theory of
> Stock Market is making waves, perils of ‘polemical economic doctrinism’
> are well known. Fear is Simon is becoming a doctrinaire or an ideologue
> instead of being an intellectually curious and open economists who
> contributes to the discourse now and here.

Jun 17 10:48 AM

[dcb:]

lastly you pop up out of no where with only one comment (this one) attacking Mr. Johnson. I can't stand foldks like you who have the nerve to attack those of us who are attempting to secure a better future for our children. My guess is that you are getting paid by someone.


On Jun 17 02:53 AM Umesh Patil wrote:

> Polemical Economic Criticism
>
> Let us face it, with a nonstop critic based on the core thesis of
> ‘uncontrollable political power’ of Wall Street Banks, Economist
> Simon Johnson is essentially becoming a critic like his another colleague
> at MIT – Noam Chomsky. Chomsky’s criticism of American Foreign Policy
> has been famous – famous for it’s exceptionally ‘lone worrier’ status
> among experts. Same seems to be Simon’s criticism of American Finance.
> For Simon and Roubini, everything comes back to the same root cause:
> inability of Washington to rein in Wall Street Banks or deficit spending.
> Most of the 10 points what Simon mentioned in this article, those
> are interlinked and essentially emerging from the same source (except
> may be the point of compensation).
>
> Fact of the matter is there is no way we are going to get what Simon
> is asking in terms bank regulation. However Simon, Roubini and Krugman
> included too – all were wrong about Bank Nationalization. Not that
> Geithner had theoretically any superior plan of ‘stress tests’ or
> the criticism of this gang was invalid. It was a valid criticism
> as well as it was true that there were gaping holes in Geithner plans.
> But the reality is like business folks these policy makers have to
> do something, have to act and take the risk. Geithner took the risk
> and despite his poor ‘delivery’ managed to get the success (private
> funding to avoid Nationalization and hence to take tax payers off
> the hook). You can very well argue that this is a short term victory
> for Geithner and long term we are still in a problem. But that is
> why JJ Cramer criticizes Dr. Doom – it is always long term for him
> despite the fact that serially he is wrong in short term.
>
> Look as Ezra Klein has explained on his blog, already the prospectus
> of any of these reforms materliazing is dim. This is due to the Congressional
> Legislative Calendar which is all tilted towards Health Care Reform.
> Next year when Finance Regulation Bills finally start moving through
> Congress how many of these ‘urges for reform’ are still going to
> be strong? Quite less. Add to that all the time made available for
> financial lobbyists to influence this reform package. Finally, the
> midterm elections by next year end will compel most of the Congress
> people to take money from these lobbyists. So where is the realistic
> chance to pass these reform bills in some stricter form? Why waste
> then ‘ink’ in criticizing it? President and Geithner have political
> jobs to do; so they will have to do this ‘salesmanship’. President
> and White House are good at it and in fact their Media Management
> skills in effect helped to create the ‘air of green shots’ which
> helped to raise private money for banks. So they are onto their own
> ‘political time table’ to organize such big media circus while releasing
> the regulation. Public and serious critics can afford to wait till
> actual bills ‘boil’ in Congress.
>
> Truth is for next year or two, people will be quite alert in terms
> of financial bubbles and dangers. In absence of these reforms, general
> vigilance will help. It is all about the period in future after this
> initial alertness.
>
> We need discourse about financial reforms keeping this context in
> mind. Otherwise, ‘single trick pony’ criticism hardly adds value
> to this discussion. Unfortunately, Simons is sounding like that,
> Dr. Roubini has been always so for quite long. At times, however,
> Krugman seems to show the openness to adapt and be flexible intellectually.
>
>
> Can we be ‘polemical’ in Economics, that is the question? When Justin
> Fox’s book about intellectual history of Economics and theory of
> Stock Market is making waves, perils of ‘polemical economic doctrinism’
> are well known. Fear is Simon is becoming a doctrinaire or an ideologue
> instead of being an intellectually curious and open economists who
> contributes to the discourse now and here.

Jun 17 10:53 AM