New Foundation, New Stability
Over the past decades, government has often weakened and jettisoned the regulations on the financial sector that were designed to bring stability to the economy
Over the past decades, government has often haphazardly weakened and jettisoned the regulations on the financial sector that were designed to bring stability to the economy. The result has been what the President refers to as a "bubble and bust" economy, leaving American families at the whim of greed and excess far beyond their control and hundreds of miles away. As the President said today, it is indisputable that this peril was a leading contributor the economic breakdown America has seen over the past years.
Today marked a culmination of a months-long process in which the President consulted with the most expert and experienced regulators, leaders in Congress, and his entire economic team to craft a revamping of the system, a "new foundation" on which our economy can grow for decades to come. Many of them joined him today as he announced the principles they had agreed upon.
The President began his remarks by diagnosing the problem:
In recent years, financial innovators, seeking an edge in the marketplace, produced a huge variety of new and complex financial instruments. And these products, such as asset-based securities, were designed to spread risk, but unfortunately ended up concentrating risk. Loans were sold to banks, banks packaged these loans into securities, investors bought these securities often with little insight into the risks to which they were exposed. And it was easy money -- while it lasted. But these schemes were built on a pile of sand. And as the appetite for these products grew, lenders lowered standards to attract new borrowers. Many Americans bought homes and borrowed money without being adequately informed of the terms, and often without accepting the responsibilities.
Meanwhile, executive compensation -- unmoored from long-term performance or even reality -- rewarded recklessness rather than responsibility. And this wasn't just the failure of individuals; this was a failure of the entire system. The actions of many firms escaped scrutiny. In some cases, the dealings of these institutions were so complex and opaque that few inside or outside these companies understood what was happening. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for their inaction.
He spelled out in depth the prescriptions he is proposing. For those who would like to read about the plan in the greatest possible detail, may we suggest the exhaustive White Paper produced by the Treasury Department (pdf). For the briefest possible overview, try the event announcement. And for those with more specific interests, the fact sheets below are also available on each of the core principles:
- Requiring Strong Supervision And Appropriate Regulation Of All Financial Firms (pdf)
- Strengthening Regulation Of Core Markets And Market Infrastructure (pdf)
- Strengthening Consumer Protection (pdf)
- Providing The Government With Tools To Effectively Manage Failing Institutions (pdf)
- Improving International Regulatory Standards And Cooperation (pdf)
The President concluded by making clear the necessity of the solution:
There's always been a tension between those who place their faith in the invisible hand of the marketplace and those who place more trust in the guiding hand of the government -- and that tension isn't a bad thing. It gives rise to healthy debates and creates a dynamism that makes it possible for us to adapt and grow. For we know that markets are not an unalloyed force for either good or for ill. In many ways, our financial system reflects us. In the aggregate of countless independent decisions, we see the potential for creativity -- and the potential for abuse. We see the capacity for innovations that make our economy stronger -- and for innovations that exploit our economy's weaknesses.
We are called upon to put in place those reforms that allow our best qualities to flourish -- while keeping those worst traits in check. We're called upon to recognize that the free market is the most powerful generative force for our prosperity -- but it is not a free license to ignore the consequences of our actions.
This is a difficult time for our nation. But from this period of challenge, we can once again tap those values and ideals that have allowed us to lead the global economy, and will allow us to lead once again. That's how we'll help more Americans live their own dreams. That's why these reforms are so important. And I look forward to working with leaders in Congress and all of you to see these proposals put to work so that we can overcome this crisis and build a lasting foundation for prosperity.