Introduction
The recession witnessed in 2007 posed a major challenge to several governments around the world. As a result reforms were carried out in many different countries to rescue themselves and gourd against future risks. This paper seeks to identify President Obama’s Wall Street reforms and the arguments for and against its different components; identify how the arguments reflect Keynesian or neoliberal welfare approaches; the interest groups that supported or were against them and finally identify whether they went far, didn’t go far enough, or were about right.
Summary of the reforms
“The provisions in the reform bill are broken into two, those that affect consumers and those those mainly affect financial institutions” (Jackson 2010, par. 2).
Consumers
- Bureau of consumer Financial Protection. This sought to establish an agency to monitor “consumer financial products such as mortgages and credit cards” (Jackson 2010). “The established agency regulates pay day lenders and check cashing businesses” (Brasc 2010, par. 3). The bureau is mandated to establish new rules for various consumer products (Jackson 2010).
- Credit/debit Card Fees. The new “bill stipulates that the amount of fees charged by banks to process debit card transactions need to be realistic and relative to the cost of the transaction” (Jackson 2010, par. 5). The new rules are to be provided by the Federal Reserve. The initial practice where 1-2% fee was required on the full cost of a business transaction was scrapped because small traders based on that to deny plastic payments for small transactions (Jackson 2010). “The bill only allows the federal government or institutions of higher learning to set a maximum acceptance for the credit card” (Jackson 2010, par. 3).
- On mortgages, the lenders are required to ascertain that borrowers can indeed pay the loans offered to them before the loan is released. Under the new bill, lenders will be penalized for careless lending (Jackson 2010). The bill seeks to ensure that consumers gain when paying back the loans offered to them as it will do away with the fees known as the “prepayment penalties” for early mortgage payment (Jackson 2010, par. 6).
- The bill also requires a borrower to be notified of his/her credit score that can lead to declining of a loan application.
Financial institutions
- The new bill gives the FDIC the power to liquidate companies that are performing poorly. It also allows the treasury department to provide the cash for liquidation followed by a repayment plan to ensure that tax payers don’t lose their money (Jackson 2010).
- The bill seeks to “create a financial oversight council that will be conducting risk assessments across the entire financial system and making recommendations to the Federal Reserve on how the risk can be alleviated” (Brasc 2010, par. 5). The “council is to be made up of ten members including heads of the federal financial agencies” (Hansard 2010, par. 6).
- The “bill seeks to change the Volcker Rule that prohibits banks from proprietary trading and investing in private equity firms or hedge funds” (Jackson 2010, par. 6). The “rule will be weakened in order to allow bigger banks to invest a maximum of 3% of “their capital in private equity groups or hedge funds” (Pendlebury 2010, par. 6).
- The bill also seeks to limit the conduction of derivative trading activities by banks (Jackson 2010). Banks will not be allowed to deal in derivatives that are considered to be risky. However, “under the new bill, banks can still trade some swaps to legitimately hedge risk. Most of these swaps will have to be cleared fast and traded on exchanges” (Jackson 2010).
- The new bill has something for credit rating agencies too. Some credit rating agencies found themselves in tight spots after the financial crisis. The credit agencies had given AAA ratings to poor mortgage backed securities (Jackson 2010). Investigations that were conducted after the financial crisis established an inherent conflict of interest between the agencies and companies. The companies were paying for the rating services. Under the new bill, ratings will be given after a study period of two years (Jackson 2010). Furthermore, a board will be entrusted with the responsibility of assigning “credit ratings agencies to issuers of asset-backed securities” (Jackson 2010).
- Under the new reforms, “A the Government Accountability Office (GOA) will be required to do a full audit of the Federal Reserve” (Jackson 2010).
- Finally, “the new bill requires that firms with over $ 50 billion in assets and hedge funds with over $ 10 billion to pay some fees for the cost of the bill” (Pendlebury 2010).
Arguments for President Obama’s Wall Street reforms
The Wall Street reform bill was mainly crafted to address Wall Street regulation issues. The Obama administration hoped that the “bill will be sufficient in addressing the widespread public anger at bankers and financiers” (Hansard 2010, par. 2).
Irresponsible lending was a major issue in the Mortgage industry. There were poor verification procedures before the issuance of loans. In addition, lenders were charging penalties for early mortgage payment (Pendlebury 2010). The new bill sought to regulate this industry and ensure that proper verification of borrowers is conducted and pre-payment penalties eliminated.
The requirement for banks to charge reasonable fees for credit card processing was lauded by “Senator Dick Durbin who felt it was good for the provision to regulate the $20 billion interchangeable fee system” (Jackson 2010).
Strong banks were also advocating for strong regulations especially on the resolution fund which had coursed some friction between the republicans and the democrats. The president had “maintained that the resolution fund of up to $ 50 billion will protect the financial system and the broader economy and American taxpayers in the event a large financial firm begins to fail” (Brasc 2010, par. 5). The U.S Chamber of Commerce asked for much bigger reforms than those proposed in the bill. But they were in harmony as “far as the need for bipartisan agreement of the legislation was concerned” (MacAskill 2010, par. 8).
Arguments against the bill
The most vocal critics of the new Wall Street bill were the republicans who felt it was not sufficient enough. Many republicans found themselves in a dilemma due to their “traditional close ties with the financial industry and public anger with the Wall Street” and as expected, most ended up voting against it (MacAskill 2010, par. 7). Some democrats also felt that the bill was not sufficient enough to regulate Wall Street.
The Volker rule which prohibited banks from trading and investment in private equity firms were repealed in the new Wall Street reform to allow large to invest up to 3% of their capital in private equity (Pendlebury 2010). This received a strong criticism from the “securities and financial markets association” which felt that the Volcker rule should be left as it is (Hansard 2010, par. 5).
Republicans had issue with the new bill on some matters and were especially not happy with its failure to “address the problems, and sustainability of mortgage giants Fannie Mae and Freddie Mac” (Jackson 2010, par. 6).
The new bill “created bureau within the Federal Reserve to regulate consumer financial products such as mortgages and the credit cards” (Pendlebury 2010, par. 5). The “exemption of auto dealers and pawnbrokers from the regulations did not go well with the department of defense which claimed that auto dealers had exploited military personnel in the past” (Pendlebury 2010, par. 6).
The notion of “too big to fail” seemed to overshadow other matters. The bailout plan for big financial institutions was a thorn in the flesh for the proponents of the new bill. Many of them felt that this was aimed at continued oppression of the smaller firms. The setting aside of up to $ 50 billion to safeguard large firms from imminent collapse was being seen by some quarters as a kind of insurance or a form of “implicit federal guarantee” (Hansard 2010). According to senate “minority leader Mitch McConnell, the Dodd’s legislation would institutionalize endless taxpayer-funded bailouts” (Brasc 2010). Some proposed breaking up of the large Wall Street banks that were holding everyone at ransom.
The tenets of neo-liberalism and Keynesian economics
Neo-liberalism
Neo-liberal economics is founded on three main elements (Kilmister 2004). First, the responsibility of government in spending is re-conceptualized. “Spending by the state is only justified by the need to make domestic capital more competitive” (Kilmister 2004, par. 5). Thus the government’s expenditure on public services such as education and health is permitted to a certain level (Kilmister 2004). However, the spending must be subject to economic justification. In addition, the private sector rather than the government is recommended to provide the public services (Kilmister 2004). The state is only required to play a role in awarding of contracts and ensuring that a level playing field is maintained for the different market players.
Secondly, neo-liberal practices aim at eliminating national economic barriers. “Neo-liberalism strongly advocates for the removal of capital and exchange controls and the opening up of financial markets to foreign investments” (Kilmister 2004).
Finally, “neo-liberalism advocates for flexible labor markets, with maximum freedom for employers in the terms of hiring and firing workers and strict limits on trade union rights” (Kilmister 2004).
Keynesian economics
This refers to a “macroeconomic theory that is based on the ideas John Maynard Keynes who was a 20th century British economist” (Sullivan and Sheffrin 2003). Proponents of Keynesian economics point out that sometimes decisions made by the private sector may sometimes result in poor macroeconomic results and thus require policy input from the public sector. The “policies may include monetary policy actions by central banks and fiscal policy by the government to stabilize output over the business cycle” (Sullivan and Sheffrin 2003). The Keynesian economics favour the idea of mixed economies that is largely private but with immense state and private sector input. This brief account of the Keynesian and neo-liberalism economic models will be used to analyse whether Obama’s Wall Street reforms are based on one of the two or are a mix of the two.
Benchmarking President Obama Wall Street reforms against neo-liberalism and Keynesian economics
The Wall Street reforms conducted by the Obama administration were predominantly based on Keynesian economics. The bill was mainly crafted to regulate financial institutions and improve services for the American consumer.
Proponents of Keynesian economics point out that sometimes decisions made by the private sector may sometimes result in poor macroeconomic results and thus require policy input from the public sector (Jackson 2010). This is what the Wall Street reforms were basically addressing. However, some instances of neo-liberalism are observed, especially on the repealing of Volcker Rule to allow strong banks to invest up to 3% of their capital in private equities (Hansard 2010). Otherwise all other major components of the bill seek to tighten the control on financial institutions and this is absolutely consistent with the Keynesian economics.
The arguments for and against the bill are not specifically driven by the two economic models but rather individual opinions regarding the situation on the ground or perceptions. Furthermore, the arguments were specific to different components that constitute the bill. A group opposing one component was seen to be totally comfortable with another. For instance, securities and financial markets association were unhappy with the repealing of the Volcker rule but accepted the bipartisan agreement.
Conclusion
Many analysts have laughed at the assertion that the new reforms will regulate Wall Street. “Evan some democrats complain that the bill does not go far in regulating the Wall Street” (MacAskill 2010). The obama administration only hopes that the bill will address the widespread issues. Thus in my opinion I don’t think the bill is sufficient enough in addressing the Wall Street woes. There are still contentious issues that need to be addressed. Issues such as the future bailout plan for large financial institutions need to be revisited and changed accordingly.
Reference list
Brasc, Walter. 2010.“No Drama Obama Needs a Strong Second Act”.
Hansard, Sara. 2010. “In Financial Reform Drama, Industry Displeasure With Obama’s Speech”. Web.
Jackson, Jill. 2010.”Wall Street Reform: A Summary of What’s In the Bill”. Web.
Kilmister, Any. 2004.Understanding Neo-Liberalism. Web.
MacAskill, Ewen. 2010.“Barack Obama’s crackdown bill on Wall Street wins Senate backing”.
Pendlebury, Steve. 2010. “Wide Range of Wall Street Reform Critics”. Web.
Sullivan, Arthur, and Steven Sheffrin. 2003.Economic Principles in Action. Upper Saddle River: Prentice Hall.