Barack Obama and Joe Biden
If you thought the fiscal cliff perils are going to blast the U.S. economy out of the water, you should peruse the list of unfinished financial reforms.
The re-election of Barack Obama and retention of a Senate Democratic majority ensures that they will continue, much to the horror of the financial services industry, which was counting -- and heavily funding -- the "repeal and replace" dogma of the Romney-Ryan campaign.
No matter how you weighed in on the election's results, many of the key reforms of the Dodd-Frank act and other matters are in limbo. They have either been tied up in regulatory purgatory, court actions or just plain delayed under heavy pressure from Wall Steet.
Not only did Wall Street lose big in the election, investors and financial services customers still have a fighting chance for some real consumer protection. And the health of the global financial system may just be saved for another day -- if the reforms are finally put into place. Demos, the progressive think tank, recently did a run down of what needs to be done. Here are some highlights:
* "The single most important holdover from the Dodd-Frank implementation process is completion of the Volcker Rule regulations. Unlike other financial reform that curb activities, the Volcker Rule prohibits federally insured banks from engaging in specific business lines: proprietary trading and investment in hedge funds and private equity funds. It should have been completed in July, but the war of words and influence over the all-important exceptions from the general prohibitions dragged on until the election intervened. The final scope of these exceptions, a complex subject to say the least, will determine the nature of banking by too-big-to-fail institutions in the years to come.
* The CFTC must complete work on the rules governing the transparency of derivatives trading. Perhaps anticipating the election, a draft final rule was just circulated that works fairly well, all things considered. Adoption would fill in a major gap in the regulatory regime for derivatives.
* To start to minimize the damage caused by speculation, the Commodities Futures Trading Commission, created by Dodd-Frank, issued draft rules last year, otherwise known as position limits. Even though the limits were quite modest, a federal judge struck them down and ruled it was not clear that position limits could be imposed without determining whether they were necessary and appropriate. As a result, no limits will be implemented and the CFTC is back to the drawing board. The clear winner in all of this is Wall Street where banks continually boast record profits while their bad behavior remains unchecked. The loser, of course, is everyone else who will see price increases in staples like food and gas. Limiting speculation would stabilize commodity prices and prevent violent price spikes.
* The major areas that must be addressed are:
- High frequency trading, the use of super computers and advanced algorithms, often to manipulate the markets;
- Money market mutual funds, the enormous pools of money susceptible to depositor runs in a time of stress (which actually occurred in 2008, requiring a Fed bailout); and
- Data systems to enable the regulators to monitor activity around the world so that they can adapt to the rapidly changing markets."
In tandem with these necessary reforms are rules governing fiduciary responsibility for retirement plans and brokers. The government, again under fierce opposition from the private sector, has been sitting on these regulations. They would go a long way to protect retirement and brokerage house investors from getting ripped off.
Another even-more visible front for financial reform is the gargantuan and unfair U.S. tax code. Hopefully Congress will tackle it as part of the fiscal cliff crisis -- or at least start a substantial national discussion on what needs to be done.
As the White House wrangles with Congress on the fiscal cliff and financial reforms, it will need some bold leadership -- someone who understands that tough financial and tax reform is what's needed and isn't afraid to use a bully pulpit. As I've mentioned in a previous post, I think that person would be Sheila Bair, whom I'm suggesting would make a great Treasury Secretary.
Since Congress only has a short period before the lemmings of political conflict drive us all over the precipice on Jan. 1, it needs to act fast in Washington time. While the $600 billion in tax hikes and spending cuts won't kick in all at once, failure to act could trigger another recession. That's not on anyone's "to do" list.
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