OPINION | 18.06.2009

Obama's financial reform plan is important but is it radical enough?

US President Obama's financial reform plan will go to Congress with a growing reputation as one of the most important in a generation. Correspondent Sabine Müller says it's not as radical a plan as it first appears.

As a consequence of the economic crisis, US President Obama wants to keep the American financial markets on a short leash. The US administration has presented a plan for the largest financial reform for 70 years which includes close supervision by the Federal Reserve as well as the creation of a new consumer protection authority.

Barack Obama is not the first US president to attempt to reform the financial markets. Some of his predecessors tried and failed. However the economic situation was in all cases not as dramatic as the one Obama faces today, where all actions seem condemned to fail. It's no surprise that this issue, more than any other, has seen the government put in so many working hours and shed so much sweat.

With the planned health reform or with climate protection, the White House has given only a rough guide as to where these policies should go. It will leave the small print to Congress to thrash out.

This has been different with the financial reform. In consultations which have lasted weeks, detailed plans have been compiled, obviously out of concern that during the ensuing debates in Congress, which must agree most measures, the most important goals could be watered down. In the paper President Obama prepared, two questions were carefully weighted to allow the plans to have the best chance of passing through Congress: what must be done to improve the financial system and what measures should be left alone?

Direct route to the middle road of compromise

Over 88 pages, all the important points are addressed and most of the answers point the plan in the right direction. However, this direction is, as usual, to the middle course of compromise.

This means that the changes to the US financial landscape are not as radical as some might have hoped for. The first example of this is the appointment of the Federal Reserve as the upper custodian of the financial sector, giving the Fed “authority and accountability” for regulating companies that pose a risk to the economy in the event of failure.

While, in the past, market participants largely policed themselves, the Fed becomes the sole regulator but with the central bank already involved in many aspects of the financial sector, in the long run, the new structure of control may not look any more streamlined than the old.

The second example is the creation of the Consumer Financial Protection Agency that would take over bank regulators' consumer-protection powers and make credit loans more transparent.

Knowing that too rigid prohibition of sales practices for financial institutions selling mortgages and loans would have been unpalatable to Congress, Obama's plan allows banks to still be regulated for "safety and soundness" by their primary regulator while the new agency would have sole authority over the structure and sale of consumer products.

The president left no doubt that this reform comes clearly written in the handwriting of the White House. This strategy of intensive commitment is risky. If the plan is a success, the majority of the plaudits will be for the president. But if it fails, the lion's share of the blame will also be laid at his door.

Sabine Mueller is a German public radio correspondent in the US (kjb)

Editor: Susan Houlton

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