Obama signaled early on that he’d do this and with Geithner’s nomination all but certain, the tough work of making sure banks don’t get “too big to fail” will begin soon enough.
Broad new outlines of the administrationâ€™s agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Obamaâ€™s economic team.
A theme of that report, that many major companies and financial instruments now mostly unsupervised must be swept back under a larger regulatory umbrella, has been embraced as a guiding principle by the administration, officials said.
Some of these actions will require legislation, while others should be achievable through regulations adopted by several federal agencies.
Officials said they want rules to eliminate conflicts of interest at credit rating agencies that gave top investment grades to the exotic and ultimately shaky financial instruments that have been a source of market turmoil. The core problem, they said, is that the agencies are paid by companies to help them structure financial instruments, which the agencies then grade.
â€œUntil we deal with the compensation model, weâ€™re not going to deal with the conflict of interest, and people are not going to have confidence that the ratings are worth relying on, worth the paper theyâ€™re printed on,â€ Mary L. Schapiro said in testimony earlier this month before being confirmed by the Senate to head the Securities and Exchange Commission.
Frankly, the idea that these practices were allowed in the first place only serves to cement how difficult it will be for deregulation advocates to gain any foothold in the future. These practices were plainly wrong and ultimately resulted in a massive drop in confidence in our economy.
Folks, markets simply can’t be trusted to regulate themselves. It doesn’t work. Even Greenspan admitted this. And it doesn’t take an economist to understand why. Markets are, by their nature, amoral. They simply find ways to make more and more money. And this results in increasingly creative ways to shuffle debt around since our economy has been predicated on deficit spending for the past 30 years.
Regardless, we’re entering a new phase and I’m hopeful that with a good mix of well-regulated markets and smart government intervention we’ll be able to get back on track.
More as it develops…