The Washington Post has released a "near final" draft of Obama's financial reform proposals. As expected, the paper whitewashes the role of the Fed and Fractional Reserve Lending as well as the role of unfunded Congressional spending in creating the mess. Instead, Obama's plan gives more power to those responsible for creating the mess.



Please consider Obama Blueprint Deepens Federal Role in Markets.



The plan seeks to overhaul the nation's outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building.



The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.



The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.



It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.



Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.



The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.



And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.



"Speed is important," Obama said yesterday in an interview aired by CNBC. "We want to do it right.

My Comment

The administration's plan leans heavily on the Fed, expanding its role as the regulator of the nation's largest banks such as J.P. Morgan Chase and Goldman Sachs to include other giant financial firms, such as the insurance companies American International Group and MetLife.



The agency, which has greater independence from the political process than other regulators, would have broad authority to impose special requirements on those companies, such as mandating that they set aside a larger percentage of their assets against possible losses than smaller firms. Such a requirement could limit large companies' appetite for risk, but also their profit and growth.

My Comment

The plan calls for a council of regulators to consult with the Fed, including the Treasury secretary and the heads of the other financial regulatory agencies: The Securities and Exchange Commission, Commodity Futures Trading Commission, the Federal Housing Finance Agency and the agencies that regulate banks.



My Comment

A second element likely to provoke fierce debate is the establishment of a Consumer Financial Protection Agency.



The agency would have a mandate to increase the availability of financial products in lower-income communities and other underserved areas, in part by enforcing the Community Reinvestment Act, which requires banks to make loans everywhere that they collect deposits.

My Comment

Several ideas have been dropped as the administration picks its battles. The plan will not include a new way of regulating insurance companies at the federal level. The insurance industry, which is regulated at the state level, is deeply divided, and the White House anticipated a distracting fight. The administration instead plans to create an office in the Treasury Department to monitor the insurance industry.



Some of the largest insurance companies could still fall under the scrutiny of the Federal Reserve in its new role as a systemic risk regulator.

Artist's Rendition of Obama's Plan





Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building.



Keith asked me to remind everyone of this important fact:





Fed Uncertainty Principle In Action

Uncertainty Principle Corollary Number Two



The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.