Last week, in an interview with Oprah Winfrey, President Obama referred to some major bankers as "fat-cats" who just don't get it. It was a moment of frustration, but Obama was correct that Wall Street is out of touch with America.
Wall Street and the big banks were a chief cause of the recession. As gradual deregulation occurred, they eagerly embraced high-risk, flimsy investments such as subprime mortgages. They created more and more derivatives, investments whose assets with based on these bad mortgages. Trilions of dollars worth of poor investments were created. It was a mess.
Banks have been hesitant to loan money, even with the massive infusions of our tax dollars given to them by the feds to restore confidence in the financial system. At recent meetings with bankers, Obama reminded them of this federal assistance and said it's time to be less stingy with lending. They must take the president's advice. We need capital flowing through the economy, promoting business and jobs.
But more is needed than just prodding banks to lend. Wall Street itself needs new, tough regulation. The U.S. House of Representatives did the right thing by passing a bill doing just that. Now the U.S. Senate needs to pass the bill and get it to Obama's desk. Unfortunately, that won't be until next year.
The House regulatory bill has several proposals that can help avoid a repeat of the financial malfeasance that caused the recession. It allows consumers protection from predatory lenders by creating an agency to focus on that widespread abuse. It also seeks to shore up the fundamentals of our banking system by having large financial institutions set up reserve funds to help prevent or resolve future major bank failures. We must assure that the collapse of a couple big banks doesn't have the destructive domino effect of last year.
Perhaps the most important feature of the House bill is that it sets strict trading rules on derivatives. No longer will these very risky securities be sold on the unregulated over-the-counter market. They would enter conventional trading, which are watched by regulators. Trillions of dollars of over-the-counter derivatives were a large cause of the global panic and recession.
A lot of this stuff falls under the "boring-but-important" category, but it must be a priority for our leaders. Wall Street and the banks have already proven they won't regulate themselves. We don't want a repeat of the current recession.
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