Leading article: An inadequate reform act, but a political victory for Mr Obama

Share
Related Topics

The 2008 global banking crisis and its catastrophic wider economic costs (which we are still enduring) called for a radical legislative and regulatory response. Alas, that is not what was delivered by the financial reform act passed by the United States Senate this week.

There are some sensible elements in the new legislation. The creation of a new agency to protect ordinary borrowers from predatory lending should help to prevent a repeat of the sub-prime debacle which saw dirt-poor Americans force-fed giant loans which they could never feasibly pay off.

But what is lacking will define this act. There is no cap on the size of the banks. There is no mandated split between retail and investment banking. There is little more than lip service paid to the plan of the former Federal Reserve chairman, Paul Volcker, to force banks to spin off their internal hedge funds. And banks will continue their derivatives trading operations pretty much as before. The fact that the share price of Wall Street banks rose sharply when the contours of this legislation came into focus tells us all we need to know about the radicalism of this reform. The result is that moral hazard remains. Half a dozen "too big to fail" banks dominate the landscape. In this context, President Obama's claim that there will be no further bail-outs of Wall Street is simply not credible. The "living wills" required of banks and the resolution authority will not do the job of imposing market discipline. And the new capital requirements will do relatively little to promote stability when all financial institutions have a clear incentive to grow larger and take ever bigger risks.

One hope lies is the section of the act that requires regulators to break up institutions that pose a threat to wider economic stability. Yet this relies on regulators being pro-active. We simply cannot say whether officials will have the courage to use these powers when the next credit boom shows signs of getting out of hand. Such are the incentives and structure of the US financial system that another disaster seems likely to be only a matter of time. To that extent, the act cannot be considered a success.

And yet success is a relative measure. All the indications are that a financial reform act under a Republican administration or a Republican-dominated Congress would have been even kinder to the vested interests of Wall Street. Whatever the shortcomings of the act, its passing is a significant political victory for the White House. And it underscores the fact that Mr Obama has been remarkably successful in terms of implementing his legislative programme. First there was the stimulus act, which according to the non-partisan Congressional Budget Office created more than one million jobs. Then there was the healthcare act, which although too watered down for many of Mr Obama's supporters, was nevertheless a landmark achievement. And now the President has delivered financial reform.

The popularity of Mr Obama has, of course, taken terrible blows in the process. But the Republicans' cynical opposition and ideological extremism have not succeeded in derailing this presidency. Mr Obama now has a reputation for getting things done. And the Democrats now have a powerful platform on which to stand in November's mid-term elections. Whatever there might be for progressives to lament in President Obama's legislative record, that alone is something to cheer.

React Now

Latest stories from i100
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Recruitment Genius: Interactive / Mobile Developer

£40000 - £45000 per annum: Recruitment Genius: This digital production agency ...

Recruitment Genius: PHP Developer - Midweight

£40000 - £45000 per annum: Recruitment Genius: This digital production agency ...

Recruitment Genius: Junior Front End Developer

£20000 - £30000 per annum: Recruitment Genius: This digital production agency ...

Recruitment Genius: Front End Developer - Midweight / Senior

£35000 - £40000 per annum: Recruitment Genius: This digital production agency ...

Day In a Page

Read Next
The UCAS clearing house call centre in Cheltenham, England  

Ucas should share its data on students from poor backgrounds so we can get a clearer picture of social mobility

Conor Ryan
A study of 16 young women performing light office work showed that they were at risk of being over-chilled by air conditioning in summer  

It's not just air conditioning that's guilty of camouflage sexism

Mollie Goodfellow
Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks