Thursday, June 18, 2009

Strengthened Federal Reserve is key to Obama overhaul of US financial regulation

House Bubble Bubble House

Obama wants to give the Fed more powers?

Assisted by fractional reserve lending, the Fed caused this financial crisis in the first place by artificially setting the interest rate too low.
Fractional reserve lending allows banks and other institutions to lend more money out than they have on deposit.

Secondly, the Fed is owned by the Wall street banks. It has written "conflict of interest" all over it. Hank Paulsen earned US$ 700 million as CEO of Goldman Sachs before they lend him out to become Treasury secretary. Then, as the Treasury secretary, he insisted the American taxpayer should bail out Goldman Sachs. Nobody asking question?

Thirdly, if and when the government borrows money to do the things we ask them to do (building roads, hospitals, defend our nation, etc) can someone explain why the government should pay interest if and when the government uses the money to the benefit for all of us?

Just some observations. The original system stays in tact and we are awaiting the next bubble....if you recognise it jump on it but do not forget to jump off at the right time.

Update: Bankers think the Obama plan is "great".

Obama Overhauls Wall Street Wall Street Overhauls Obama


President Barack Obama has outlined the most comprehensive overhaul of the US financial regulatory framework in 70 years in an attempt to stop the banking meltdown of the last two years from reoccurring and to "build a new foundation for sustained and lasting growth".

Introducing the sweeping reforms, the centre-piece of which strengthens the hand of the Federal Reserve beyond all others, the US President said that he wanted to eradicate "a culture of irresponsibility" which had taken "root from Wall Street to Washington to Main Street."

In its place he plans to deliver "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 we've witnessed in recent years."

The main changes outlined include:

• a strengthened Federal Reserve to take responsibility for major banks, which will be subject to tighter regulation;

• a council of regulators to identify gaps in regulation while eradicating the outdated Office of Thrift Supervision;

• the development of a 'resolution authority' to seize non-bank financial firms whose collapse would pose a systemic risk;

• the creation of a new consumer protection agency;

• tighter rules on risky products at the heart of the credit meltdown including derivatives and asset-backed securities;

• and to work with international regulators on uniform standards.

Speaking after a meeting with many of America's leading regulators, including Fed chairman Ben Bernanke, President Obama stressed that he did not want to repeat a situation where America was "facing one of the largest financial crises in history – and those responsible for oversight were mostly caught off-guard and without the authority needed to address the problem."

He used the landmark address, the details of which will be closely studied by all those in the banking on both sides of the Atlantic, to criticise the industry for creating complex financial instruments "built on a pile of sand" and for allowing "excessive executive compensation – unmoored from long-term performance or even reality – [which] rewarded recklessness rather than responsibility."

Congressman Barney Frank, who chairs the influential House of Representatives Financial Services committee, said later he regards the proposals as "pro-market."

For some however the proposals, contained in a financial regulatory reform white paper which will be debated by both the House and the Senate later in the year before becoming law, did not go far enough.

John Berlau, of the Competitive Enterprise Institute, said the proposals "leaves the status quo among regulatory agencies largely in place, and only adds additional layers of "systemic" regulation from "super" agencies such as the Federal Reserve."

Bank shares responded negatively to the news and Standard & Poor's cutting the credit ratings of 22 major banks at the prospect of increased regulation and transparency. Goldman Sachs fell 2.26pc and Morgan Stanley by 2pc, despite being among those that repaid (TARP) funds to the US Treasury yesterday.

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