After the elections, it’s likely that the Obama team will continue the regulatory
overhaul begun by the Bush administration aimed at preventing a recurrence
of the housing and financial market crises. Importantly, Obama was
advocating re-regulation well before the financial crisis worsened — in a
speech5 made soon after the Bear Stearns collapse in March, Obama outlined
six principles that, in his opinion, “should guide the legal reforms needed to
establish a 21st century regulatory system:”
1. The Federal Reserve should have basic supervisory authority over any
institution to which it may make credit available as a lender of last resort.
2. There needs to be general reform of the requirements to which all
regulated financial institutions are subjected. Capital requirements should
be strengthened.
3. We need to streamline a framework of overlapping and competing
regulatory agencies.
4. We need to regulate institutions for what they do, not what they are. Over
the last few years, commercial banks and thrift institutions were subject to
guidelines on subprime mortgages that did not apply to mortgage brokers
and companies. Now, it makes no sense for the Fed to tighten mortgage
guidelines for banks when two-thirds of subprime mortgages don't
originate from banks.
5. We must remain vigilant and crack down on trading activity that crosses
the line to market manipulation.
6. We should create a financial market oversight commission, which would
meet regularly and provide advice to the president, Congress and
regulators on the state of our financial markets and the risks that face
them.
Similarly, in a pre-election interview with CBS News,6 Senator Obama said that:
Unless we update our 20th century regulatory framework for a 21st century
global financial system, then we're going to continue to be vulnerable to this
kind of situation, and I think the next president has to come in with a very
strong package of reforms [italics added].
Austan Goolsbee, a top economic adviser to Obama, was quoted7 before the
election as saying that a Wall Street overhaul plan “could be early” in the new
administration’s tenure.
Obama is not just focused on increased regulation of Wall Street — we pointed
out in “Election ’08: Back to the Future?” that he has promised to crack down
on other parts of the financial sector:
Obama blames high medical malpractice premiums on the insurance
companies that write these policies. On his campaign website, the
candidate states that “Obama will strengthen antitrust laws to prevent
insurers from overcharging physicians for their malpractice insurance”…
Obama has a proposal that would ban universal defaults,8 and interest on
fees by credit card companies. It would also require the companies to apply
interest rate increases only to future debt.
Increased consumer protection has been a theme for the Democrats since they
regained control of the House and Senate in 2007, after 12 years of nearly
unbroken Republican rule. For example, in November 2007, the House of
Representatives passed “The Mortgage Reform and Anti-Predatory Lending
Act” (sponsored by three Democrats, including Barney Frank, the Chair of the
House Committee on Financial Services) in order to “combat abuses in the
mortgage lending market, and to provide basic protections to mortgage
consumers.” So, as with Obama, a Democratic Party move towards increased
regulation got under way well before the financial crisis worsened.
Finally, as a Citi Investment Research report9 highlighted, President Obama
may be willing to embrace policies with protectionist overtones:
In his own speech on the final night of the [Democratic] convention [in
August], Senator Obama added a commitment to end tax breaks to
corporations that ship jobs overseas and to replace them with tax breaks for
companies that create jobs domestically, hinting at more nationalistic,
populist policies.
