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New Consumer Financial Regulation

by Flexo on June 18, 2009

in Economy

The White House is proposing a realignment of the financial regulation that failed to prevent the latest recession, but will the proposals help protect consumers? There is a long way to go between the President’s proposal and the enactment of a law, but here are the highlights as the plan stands today.

The Financial Services Oversight Council, run by the Treasury, will “help fill gaps in regulation, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities.” They will have the power to gather information from any financial firm to identify risks. The Council will be composed of one leader from each of the federal financial regulators.

Not only banks will be regulated. Any company whose size allows its instability to threaten the stability of the economy will be within the scope of the increased regulation.

There will be no more federal thrifts.

Hedge funds and other private pools of capital will be required to registers with the SEC.

The government will create the Consumer Financial Protection Agency (CFPA). This agency stands to be one of the strongest in terms of ability to create and enforce regulations throughout the financial industry. The organization will focus on transparency, simplicity, fairness, accountability, and access.

Along with the elimination of federal thrifts, the Office of Thrift Supervision (OTS) will also disappear or be incorporated into other regulatory agencies. Interestingly, this is the one regulator bankers like. In the current environment, financial companies can often shop around for their favorite regulator, and the OTS has often been chosen thanks to their hands-off approach. OTS was the supervisor of choice for the failed companies IndyMac, Countrywide, Washington Mutual, and AIG. Other regulators were not immune, however.

Just like the FDIC helps banks fail in an organized manner rather than allowing the failure to spur chaos, the new regulatory system would do the same for all other large financial companies.

Penelope Wang from CNN explains how these regulations might affect consumers.

  • Consumers will have access to “plain-vanilla” mortgages with simple terms and pricing. In my opinion, these are almost guaranteed to be more expensive thanks to the simplicity premium.
  • Brokers will not be encouraged to “suggest” customers choose unaffordable mortgages.
  • Some overdraft loan changes will require customers to opt in to overdraft protection.
  • Regulators would enforce fair lending laws so more low-income families would have access to financial services.

New Foundation, New Stability, Jesse Lee, The White House, June 17, 2009
How Obama’s Financial Watchdog Could Protect You, Penelope Wang, CNN, June 17, 2009

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$700 Billion to Bail Out the Financial Industry: Good Idea or Bad Idea?

by Flexo on September 22, 2008

in Economy

Over the weekend, President Bush asked Congress to grant the United States Treasury Department the authority to purchase $700 billion in assets from troubled financial companies. The government would create a corporation, like 1933’s Home Owners’ Loan Corporation, to buy mortgage-backed securities at a discount and sell them later for a profit.

This is by any measure the biggest government intervention in an economy ever. So much for “free market.”

Do these financial companies deserve to be bailed out? They created, marketed, and sold risky mortgages. The market has determined that the bundles that the financial companies created to market these mortgages to investors are worth nothing. That is, the supply of these mortgage securities is high while the demand does not exist. If you can’t sell a product, it is “worth” $0.

Through the bailout, the government is saying that they’ll pay a certain amount for the securities the market has determined are worthless. In addition, the government believes that they will make money throughout this process. That is, in the future, either someone else will buy the securities or the rate of default on the mortgages will improve.

The default rates won’t improve unless conditions improve for homeowners. This plan does not address the homeowners, only the financial industry.

It’s unfortunate that greedy companies and greedy people, as well as homeowners who were led to believe they could afford their mortgages, won’t be forced to suffer the full consequences of the creation and purchase of risky mortgages. This sends the message that corporations and homeowners are encouraged to lie, cheat, and steal: Once the situation gets bad enough, all past sins will be forgiven.

Nevertheless, a bailout of this size is most likely necessary to help stabilize the economy, and without it, the world’s economies might experience a devastating collapse in a manner never experienced before.

Is a $700 billion bailout the right course of action? Should failing companies and defaulting homeowners be saved? What is needed for the global economy to move in the right direction?

Photo: epicharmus

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