TOPICS > Economy

Regulatory Reform Plan Aimed at Protecting Larger Economy

June 17, 2009 at 6:00 PM EDT
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President Barack Obama proposed a major overhaul of financial industry regulation Wednesday. White House adviser Christina Romer explains the administration's plans.
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JIM LEHRER: President Obama laid out a plan today to reshape the federal system of financial regulation. He called for new powers and a new agency to protect investors and the larger economy.

Ray Suarez has our lead story report.

RAY SUAREZ: The president unveiled his proposals for a regulatory reform plan in an afternoon announcement at the White House. It’s billed as the biggest overhaul of its kind in decades, and Mr. Obama warned it’s long overdue.

BARACK OBAMA, President of the United States: It is an indisputable fact that one of the most significant contributors to our economic downturn was an 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.

RAY SUAREZ: The administration’s plan calls for a new agency to protect consumers by regulating credit cards and basic bank accounts, among other things. It also calls for curbs on home mortgage lenders, mandating simpler loans without hidden costs.

The 88-page plan says the Federal Reserve would supervise financial firms considered “too big to fail.” A new council would monitor risk across the financial system. And the Securities and Exchange Commission would force greater disclosure by hedge funds and, for the first time, regulate credit default swaps and other exotic financial instruments.

The Obama plan stops short of a sweeping reorganization of existing agencies. The president said he sought “a careful balance” after consulting congressional leaders, industry experts, and consumer advocates.

BARACK OBAMA: I believe that our role is not to disparage wealth, but to expand its reach, not to stifle the market, but to strengthen its ability to unleash the creativity and innovation that still makes this nation the envy of the world.

So that’s our goal: to restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed, in which honest, vigorous competition in the system is prized, and those who game the system are thwarted.

Hearings on the plan

John Boehner
House Minority Leader
If you look deeply into some of what the president's calling for, we'll have the federal government deciding what interest ought to be charged on credit cards, we'll have the president's proposal decide what kind of financial products are available.

RAY SUAREZ: Initial hearings on the plan will be tomorrow, and Democrats chairing key committees -- Senator Chris Dodd and Congressman Barney Frank -- promised today to answer the president's call for action by year's end.

But the plan drew fire from top Republicans, including House Minority Leader John Boehner on ABC'S "Good Morning America."

REP. JOHN BOEHNER (R-OH), House Minority Leader: If you look deeply into some of what the president's calling for, we'll have the federal government deciding what interest ought to be charged on credit cards, we'll have the president's proposal decide what kind of financial products are available.

And I just think that the government involvement in the financial industry is going to be too big of a foot on an industry that's already having problems.

RAY SUAREZ: The American Bankers Association also weighed in. It agreed an overhaul is badly needed, but it warned the president's ideas fall short. In a statement, the ABA said, "The administration's proposal is so vast and controversial that it will be extremely difficult to enact and will produce great uncertainty in the financial markets and among financial regulators."

In a related development, several major banks began repaying nearly $70 billion in federal rescue loans today. They received the money last fall in an effort to loosen credit markets.

Preventing future meltdowns

Christina Romer
Council of Economic Advisers
We know that a lot of financial institutions were taking on too much risk...So, absolutely, we think this is something that would very much help to prevent those kind of things from happening.

JIM LEHRER: Judy Woodruff has a closer look at the proposal.

JUDY WOODRUFF: And joining me for that from the White House briefing room is Christina Romer. She's chair of President Obama's Council of Economic Advisers.

Ms. Romer, thank you for being with us.

CHRISTINA ROMER, Chair of the White House Council of Economic Advisers: Glad to be here.

JUDY WOODRUFF: I think the first thing on many people's minds is, is this a set of proposals that, if enacted, would prevent another financial meltdown like the one last fall?

CHRISTINA ROMER: That's certainly what it's aimed to do. Of course, none of us can see into the future, but absolutely it's designed to deal with the failures that we think happened last fall in the regulatory system.

We know that a lot of financial institutions were taking on too much risk. We know, on the consumer side, a lot of people were taking out loans they didn't understand or that had clauses in it that were going to cause problems down the road. So, absolutely, we think this is something that would very much help to prevent those kind of things from happening.

The other thing I think is important is it is forward-looking. One of the things that it does is to create this oversight council of regulators to make sure that there aren't gaps, to make sure that as we go forward there aren't new markets coming in that nobody's looking at. And so that's going to be important for preventing crises in the future.

JUDY WOODRUFF: What are the main things that would be different for ordinary Americans if this were enacted?

CHRISTINA ROMER: Well, I'd do two of them. Of course, we have -- the new thing is going to be the Consumer Financial Protection Agency, to take the consumer regulations -- the things that cover credit cards, mortgages, auto loans, student loans, those are kind of now scattered about lots of regulators and to put them into one agency that only watches out for consumers.

So I think, absolutely, consumers are going to be better protected. They're going to be assured of more transparency to make sure that, any time there's a complicated product, there's also a plain vanilla one in case that is more comfortable. So that's going to be important for ordinary Americans.

But I'd really stress the overall economy is very important to ordinary Americans, too, and I think one of the things we learned last fall is that Wall Street and Main Street really do go together.

So these things that might seem academic or esoteric to the average American -- a systemic regulator, better oversight -- is actually crucially important to them, because it is going to make sure we don't have these same kind of financial crises in the future.

Opposition from both sides

Christina Romer
Council of Economic Advisers
What we did is to make the judgment, of the agencies out there, what was the one most likely to be able to take on this additional role? And the Federal Reserve certainly seemed to have the knowledge, the staff, the institutional framework.

JUDY WOODRUFF: You mentioned systemic regulator and, indeed, you do put a lot of additional power in the hands of the Federal Reserve Board. We're already today hearing criticisms of that on the Republican side.

I think Richard Shelby from the Banking Committee was saying this is an agency that failed the American people. Even Chris Dodd, the Democrat chairman of the committee, is saying, you know, he's not at all sure that that's going to fly. How can the administration be sure you're doing the right thing?

CHRISTINA ROMER: You know, what we did is to make the judgment, of the agencies out there, what was the one most likely to be able to take on this additional role? And the Federal Reserve certainly seemed to have the knowledge, the staff, the institutional framework.

The other thing is, I would take exception to the idea that the Federal Reserve failed the American people in this crisis, that a lot of -- you know, a lot of the institutions that are now regulated by the Fed weren't regulated by them back last fall and before. So the idea that they're somehow to blame for a lot of these regulatory lapses I think is unfair.

And then the other thing to say is, certainly, the Federal Reserve has stepped up in a lot of ways that maybe, when we came to the edge of the cliff, they're a big reason that we didn't go over. So I certainly think that, you know, we've made a judgment that they are a reasonable place to put this.

Another thing I'd emphasize is that we have put some restrictions on them. For example, taking the consumer protection out of the Federal Reserve, to - so things like that. Certainly, where they have powers now in unusual circumstances, we've said, we actually think the secretary of the treasury should have to sign off on those. That's another way to get them some checks and balances.

JUDY WOODRUFF: On the other hand, you have administration officials who've been quoted in the press in the last few days as saying this whole thing was a result of a compromise, that the administration had wanted to do much more, but because there was a fear you couldn't get anything more through Congress, that the president -- and the president himself acknowledged in his statements over the last few days, when he said, "We didn't want to tilt at windmills."

How much of concessions did the president, did the administration make in order to get this through?

CHRISTINA ROMER: I think the president this afternoon was very clear that we didn't concede on anything that we thought was crucial, that we said we're not going to take a bulldozer and just get rid of everything that was there and start afresh, but to say, take what we have, figure out what didn't work, what had to be changed to make it work in the future, and we absolutely made those changes.

So the oversight council we think is very important. Making sure that somebody is watching all of the large, systemically important institutions, even if they're not banks, that's crucially important. So we didn't concede on any of the fundamentals.

Too much government intervention?

Christina Romer
Council of Economic Advisers
The president has also made it clear, one, that the status quo just can't go on, that we do know that -- you know, maybe memories are fading, but I certainly remember last fall and how difficult it was then.

JUDY WOODRUFF: How do you answer this criticism from House Republican Leader John Boehner that this is just too much of the federal government putting its foot into the banking system?

CHRISTINA ROMER: I disagree very fundamentally. One of the things you see is that, you know, what we're saying, for example, on the consumer protection side is to put in place an agency whose job it is to watch out for consumers, not to impose all of the minute regulations that the senator was talking about.

Likewise, think about, on the systemic regulator, one of the main things we're talking about is higher capital requirements. That is such a sort of market-based approach, to say the best way we think to make sure that financial institutions don't take too much risk is to make sure they have money on the line. And so those are the kinds of things that you see very much in this proposal.

JUDY WOODRUFF: We're going to be hearing in a moment from a representative of the American Bankers Association. Among other things, they are saying that this proposal is so big, so controversial, it's going to be very difficult to enact, going to create uncertainty in the financial markets. What do you say?

CHRISTINA ROMER: We certainly have done a lot of consultation. We're very encouraged by the support that we're getting from Congress.

The president has also made it clear, one, that the status quo just can't go on, that we do know that -- you know, maybe memories are fading, but I certainly remember last fall and how difficult it was then. And I think when members of Congress and others in the economy recall how close we came to a cliff, I think these ideas will get new urgency.

And, certainly, the president has also said, this is so much a part of his overall agenda, the idea that we need a new foundation, that we're not just going to come through this crisis, we're going to come through stronger than before.

And he is certainly committed to both health care reform, that he mentioned on Monday, and now financial regulatory reforms. So we are very optimistic that we will be able to do both of those.

JUDY WOODRUFF: Christina Romer, chair of the president's Council of Economic Advisers, thanks very much.

CHRISTINA ROMER: Thank you.