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
iJobs Job Widget
iJobs General

Recruitment Genius: SAGE Bookkeeper & PA to Directors

£18000 - £24000 per annum: Recruitment Genius: An exciting opportunity has ari...

Recruitment Genius: Online Sales and Customer Services Executive

£15000 - £18000 per annum: Recruitment Genius: An On-line Sales & Customer Ser...

Recruitment Genius: Accounts Assistant - Fixed Term Contract - 6 Months

£15000 per annum: Recruitment Genius: One of the largest hospitality companies...

Recruitment Genius: Electricians - Fixed Wire Testing

£28000 - £32000 per annum: Recruitment Genius: As a result of significant cont...

Day In a Page

Read Next
Neo-Nazis march in London  

I'm taking my Jewish kids to a vile neo-Nazi rally in London this weekend because I want them to learn about free speech

Richard Ferrer
A police officer carries a casualty to safety  

Tunisia attack proves that we cannot stop terrorists carrying out operations against Britons in Muslim countries

Robert Verkaik
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

No grace of God for Katy Perry as sisters act to stop her buying convent

Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

Something wicked?

Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
10 best sun creams for body

10 best sun creams for body

Make sure you’re protected from head to toe in the heatwave
Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

Nick Bollettieri's Wimbledon files

Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

There is more than a shiny trophy to be won by England’s World Cup women

The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map