Economic Perspectives with Hopeton Hay on KAZI 88.7 FM in Austin, TX

President Obama’s Speech on Financial Regulatory Reform

Posted by Hopeton on June 20, 2009

On June 17 President Obama announced his plans to reform the regulation of the nation’s financial system.  Enclosed below are the unedited remarks he made at the press conference announcing his plans for reform.

President Obama speaking at June 17 press conference

President Obama speaking at June 17 press conference

Since taking office, my administration has mounted what I think has to be acknowledged as an extraordinary response to a historic economic crisis. But even as we take decisive action to repair the damage to our economy, we’re working hard to build a new foundation for sustained economic growth. This will not be easy. We know that this recession is not the result of one failure, but of many. And many of the toughest challenges we face are the product of a cascade of mistakes and missed opportunities which took place over the course of decades.

That’s why, as part of this new foundation, we’re seeking to build an energy economy that creates new jobs and new businesses to free us from our dependence on foreign oil. We want to foster an education system that instills in each generation the capacity to turn ideas into innovations, and innovations into industries and jobs. And as I discussed on Monday at the American Medical Association, we want to reform our health care system so that we can remain healthy and competitive.

This new foundation also requires strong, vibrant financial markets, operating under transparent, fairly-administered rules of the road that protect America’s consumers and our economy from the devastating breakdown that we’ve witnessed in recent years.

It is an indisputable fact that one of the most significant contributors to our economic downturn was a unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis — the Great Depression — was overwhelmed by the speed, scope, and sophistication of a 21st century global economy.

In recent years, financial innovators, seeking an edge in the marketplace, produced a huge variety of new and complex financial instruments. And these products, such as asset-based securities, were designed to spread risk, but unfortunately ended up concentrating risk. Loans were sold to banks, banks packaged these loans into securities, investors bought these securities often with little insight into the risks to which they were exposed. And it was easy money — while it lasted. But these schemes were built on a pile of sand. And as the appetite for these products grew, lenders lowered standards to attract new borrowers. Many Americans bought homes and borrowed money without being adequately informed of the terms, and often without accepting the responsibilities.

Meanwhile, executive compensation — unmoored from long-term performance or even reality — rewarded recklessness rather than responsibility. And this wasn’t just the failure of individuals; this was a failure of the entire system. The actions of many firms escaped scrutiny. In some cases, the dealings of these institutions were so complex and opaque that few inside or outside these companies understood what was happening. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for their inaction.

An absence of oversight engendered systematic, and systemic, abuse. Instead of reducing risk, the markets actually magnified risks that were being taken by ordinary families and large firms alike. There was far too much debt and not nearly enough capital in the system. And a growing economy bred complacency.

Now, we all know the result: the bursting of a debt-based bubble; the failure of several of the world’s largest financial institutions; the sudden decline in available credit; the deterioration of the economy; the unprecedented intervention of the federal government to stabilize the financial markets and prevent a wider collapse; and most importantly, the terrible pain in the lives of ordinary Americans. And there are retirees who’ve lost much of their life savings, families devastated by job losses, small businesses forced to shut their doors.

Millions of Americans who’ve worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight. Our entire economy has been undermined by that failure….Click here to read the rest of speech.

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2 Responses to “President Obama’s Speech on Financial Regulatory Reform”

  1. Some where down the line every person who has trasacted to give or take loans and the bundled loans and derivative have to bear the responsibility. It is entry of those who could not understand the nature of underlying security and the implications of the same, in to the game upset the applecart. The caution ahead will take care of the problems for learning comes after the mistakes are made. The hardship faced for the time being may well have to be withstood and the conservatism has to be given some respect.

  2. They’ve left the rotten apple in the reform barrel though!

    Though the proposed financial regulatory reform often speaks about more stringent capital requirements it still conserves the principle of “risk-based regulatory capital requirements” and by doing so the “New Foundation” builds upon the most fundamental flaw of the current regulatory system.

    Regulators have no business in trying to discriminate risks since by doing so they alter the risks and make it more difficult for the normal risk allocation mechanism in the markets to function.

    Financial risk cannot only be managed by looking at the recipients of funds since those lending or investing the funds are also an integral part of the risk. High risks could be negligible risks when managed by the appropriate agents while perceived low risks could be the most dangerous ones if the fall in the wrong hands.

    The recent crisis detonated because some very simple and straight-forward awfully badly awarded mortgages to the subprime sector, managed to camouflage themselves in some shady securities and thereby hustle up an AAA rating. This crisis did not grew out of risky and speculative railroads in Argentina this crisis had its origins in financing the safest assets, houses, in supposedly the safest country, the US.

    Are you aware of that if a bank lends to a borrower that has been able to hustle up an AAA the regulators have authorized the banks to leverage their equity 62.5 to 1?

    http://www.subprimeregulations.blogspot.com/

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