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What will happen to Obama Financial Regulatory Reform initiative?

Perhaps it is unfair to place the blame on Mr. Obama, but I continue to believe that Obama administration should be held responsible for the economic problems facing the country and their continued lack to address the fundamental causes behind the current economic crisis.


Yes, the Obama administration has put forward an agenda for financial regulatory reform, but their seem to little signs right now that this agenda will move forward in any meaningful fashion. The fact that Mr. Obama does not seem to be listening to the likes of Mr. Paul Volker is not a good sign at all.

One part of the regulatory reforms concerns the over-the-counter (OTC) derivatives market. Mr. Geithner has indeed put forward a plan to move forward on this front, and recently the house panel has approved a diluted version of the same.

In this particular regard, Tuesday's Frontline episode titled "The Warning" tell the story of Ms. Brooksley Born who tried to regulate the OTC derivatives market back in 1998, and was shot down by none other than the committee to save the world.

I hoper that Mr. Summers and Mr. Geithner have learned from the recent experience and their past mistakes, and will take forward the ideas of Ms. Born in earnest. 

The regulation of OTC derivatives was not the sole cause of the current crisis, and regulation will not necessarily prevent a future crisis, but as Mr. Stiglitz put it:

I think to understand the crisis of 2007, 2008, 2009, you have to understand that it had many, many sources, many, many factors that contributed to it. The underlying recklessness of the banks, their perverse incentive structures, the fact that they were too big to fail encouraged them to engage in excessive risk taking; meant that if you had tied their hand in one direction, it's likely that they would have moved in another direction.

But it's absolutely clear to me that if we had restricted the derivatives, some of the major problems would have been avoided. Some of what it has cost American taxpayers -- a great deal would have been avoided. I think there is a very high probability, for instance, that we would not have had to pay out the hundreds of billions of dollars that have gone to AIG, that much of the other financial turmoil we would have avoided. But we still would have had the problems of the mortgages; we still would have had the problems at rating agencies.

So I think it's too simplistic to say that if we had done this one thing, we would have avoided the crisis. ... I view her experience as a dramatic illustration of what was wrong with the system and the power of the financial markets to resist doing what should have been done. But they did it with predatory lending; they did it with mortgages; they did it in area after area. And it would have needed a comprehensive attack to stop that. ...


And, that's what makes the overall financial regulatory reform so critical.

Watch the Frontline Episode here: