Secretary of the US Treasury, Timothy Geithner, has informed Congress that the Obama administration is preparing to submit proposals for reform of the US financial market. This is an attempt to enact measures that will avoid repetition of the Crash of 2008, by reducing “systemic risk”.

Although billed as one of the most significant reforms of the financial system since the New Deal, most observers are skeptical that substantive change will ensue.

A one-party, slap-dash reform with an Obama brand

The historic models for effective financial reform were the Glass-Steagall Banking Act of 1933, the Securities Act of 1933, and the Securities Exchange Act of 1934.

	Ferdinand Pecora (1933)

The financial market reforms of the New Deal lasted for over fifty years and were emulated in other markets throughout the world. These reforms were based on two years of work by the US Senate Pecora Commission that spanned two administrations and had bipartisan support.

The Pecora Commission received testimony from many sources and findings were well-publicized over a long period, allowing solid public support for real reform to develop.

In contrast, the Obama “reforms” are being concocted in secret, within the US Treasury Department, to be rushed through the Pelosi-Reid Congress, already famous for passing substantial legislation in the dark of night, without even reading the text.

A missed opportunity looms

There is consensus that financial reforms are necessary and that events like the Crash of 2008 are to be avoided in the future.

However, there is no wide consensus as to the root causes of the market failure or what should be done.

To reach such consensus, extensive non-partisan hearings would be required, with hundreds of witnesses and with time allowed for opinion to form as to causes and cures.

The only model we have for financial market regulation are the patchwork of agencies, put together over a half-century ago, when investor demographics and market structure and technology were entirely different from today.

A few basic questions to be explored, not currently being considered, are:

• How to protect investors when responsibility is diluted through a chain of fiduciaries?
• How to prevent financial institutions from becoming too complex to manage and regulate?
• How to adjust the tax code so as to support the interests of long-term investors in an inflationary environment?
• How to protect investors against equity dilution through stock buybacks, options, and mergers and acquisitions?
• How to limit dangerous speculative behavior on the part of depository institutions?
• How to regulate money market funds which have become, in effect, depository institutions?

Undoubtedly, some measures being proposed by the Obama administration will be useful.

However, the opportunity for real reform is likely to be missed.

Capitalism is simply not on the Obama agenda

President Obama was not elected on a platform that endorsed free-enterprise capitalism. Instead, his goals are universal health care reform, “green” energy, support for labor unions, and bigger government.

At the same time, the US Congress, dominated by entrenched fiefdoms supported by gerrymandered districts and rights of incumbents, has financial policy firmly under the control of the very people who were most responsible for the current crisis: Barney Frank and Chris Dodd.

There is no spirit of bipartisanship. Instead, there is a rush to push measures through, willy-nilly, without due consideration or backing from the general public.

President Obama has never given a major speech in defense of free enterprise or the capitalist system. Indeed, he has no roots on this side of the economic spectrum. His political support comes from the extreme left.

It is possible that this could change, but highly unlikely.