The financial crisis and resulting recession were clarion calls for stepped-up financial regulation. Accordingly, President Obama has proposed to Congress wide-ranging measures that would greatly impact Wall Street and Main Street.
But it will take the congressional end of Pennsylvania Avenue to tackle the plan's biggest shortfall: not adequately addressing "too-big-to-fail" -- the idea that financial firms such as AIG are too interdependently intertwined and thus need to be bailed out by taxpayers because their failures could bring down the entire financial system.
It's not that the president's proposal doesn't try. One element of the plan would grant new powers to the Federal Reserve Bank to regulate "systemically important" financial institutions, and to increase the capital reserves required beyond current standards. But those steps might not be enough.
Gary Stern, president of the Federal Reserve Bank of Minneapolis, recently told Congress: "I do not think that intensification of traditional supervision and regulation of large financial firms will effectively address the too-big-to-fail problem."
University of Minnesota Prof. Christopher Phelan, who is a consultant to the Minneapolis Fed, agrees. "They believe that just by getting those regulations right they can make sure this just doesn't happen again," Phelan said. The Obama plan "doesn't solve the essential moral hazard problem." One option would be to require firms to more specifically detail and guarantee how they would meet their financial obligations in the face of business failure -- without taxpayer aid.
That's why Congress needs to be more aggressive than the president as it considers the revised rules. Not since the Great Depression have the political and economic environments created the conditions for bold, probusiness, proconsumer and protaxpayer regulatory reform. And unlike so many issues that divide the nation and its representatives along partisan lines, the revulsion over bailing out Wall Street was bipartisan. This is the perfect time to try to ensure the need doesn't reoccur.
There are admirable aspects to the Obama plan, especially enhanced consumer protection. A new Consumer Financial Protection Agency would be created to increase the fundamental fairness and safety of mortgages, credit cards and other consumer financial products.
"In order to attack this problem, there has to be some recognition that financial institutions are not uniquely above adhering to deceptive practice laws and standards for consumer protection that other industries are held to," said Prof. Prentiss Cox, associate clinical law professor at the University of Minnesota.
Inevitably there will be resistance to any regulatory overhaul, especially from industry interests. "Initially we do have some major concerns," said Joe Witt, president of the Minnesota Bankers Association. "The creation of the new consumer protection agency seems like a duplicate regulation" that could be expensive for banks, he said.
Witt's colleague, Steve Johnson, who is director of government relations, thinks instead of focusing on the community banks that mostly make up his organization, any new regulation should target "the shadow banking system'' where "the light needs to be shined."
Indeed, the light should shine on the entire financial services industry. Real reform is necessary, not just to protect consumers and taxpayers, but also for the broader U.S. economy. As we've learned over the past few months, a stable financial system is integral to economic growth.
The burden now falls on Congress to fill in the gaps of Obama's plan. Let's hope the legislative branch isn't too big to fail the challenge.