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ECONOMY-US: Obama Presses Reforms Ahead of G20 Meet

Eli Clifton

WASHINGTON, Sep 14 2009 (IPS) - U.S. President Barack Obama called Monday for stricter regulation in the financial industries and warned firms that are considering large bonuses for their executives to remember the debt they owe to taxpayers and the federal government for bailing them out last year.

Obama’s speech was delivered at Federal Hall in New York on Wall Street – a stone’s throw from a number of the financial firms which went out of business or were bailed out during last year’s financial crisis.

It came on the one-year anniversary of the collapse of Lehman Brothers, less than two weeks from the upcoming G20 summit in Pittsburgh, and on the heels of a poll released Sep. 11 that shows widespread support both in the U.S. and internationally for increased government spending and regulation of financial markets.

“I want everybody here to hear my words. We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,” warned Obama.

“Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall,” he said.

At the heart of Obama’s speech were two policy proposals which he argued would form the “most ambitious overhaul of the financial regulatory system since the Great Depression”.

First, a shift in the responsibilities of regulatory agencies should ensure that consumers are protected from predatory lending and mortgage servicing and bait and switch credit card offers.

Overhauls in consumer protection, according to Obama’s proposed plan, would ensure greater transparency in loan agreements and make financial agreements easier for consumers to understand. The effort would be spearheaded by Obama’s newly proposed Consumer Financial Protection Agency.

Second, Obama proposed closing regulatory loopholes which permitted some financial services providers to choose their own regulators or in other cases allowed firms – such as hedge funds – to operate outside of the regulatory framework all together.

“Where there were overlaps, regulators often lacked accountability for inaction. These weaknesses in oversight engendered systematic, and systemic, abuse,” he said.

At the heart of Obama’s speech was the idea that financial services providers who chose to play by the rules and follow ethical business standards were put at a disadvantage by a system that gave incentives to firms which were dishonest with customers and utilised loopholes in the regulatory framework.

“We ought to set clear rules of the road that promote transparency and accountability. That’s how we’ll make certain that markets foster responsibility, not recklessness,” he said. “That’s how we’ll make certain that markets reward those who compete honestly and vigorously within the system, instead of those who are trying to game the system.”

Obama’s endorsement of an overhaul of regulatory institutions and consumer protection agencies may receive wide support both internationally as well as in the U.S.

A new poll released by the BBC, GlobeScan and the Programme on International Policy Attitudes (PIPA) last week showed that 46 percent of respondents in a 20-country poll were satisfied with how the U.S. government has responded to the financial crisis while 39 percent were dissatisfied.

Respondents were evenly split between those who were satisfied and dissatisfied with their government’s response.

“People around the world are looking for a dynamic approach to the economic crisis and are giving relatively good marks to the active efforts of the Obama administration,” said Steven Kull, director of PIPA.

Obama made several references to the upcoming G20 summit in Pittsburgh next week, where he said he would press other countries to reform their regulatory institutions.

He emphasised that the implementation of regulatory system reforms had to be an international effort and that reform of the U.S. regulatory systems was part, but not the entirety, of a solution to prevent a future financial crisis.

Obama recalled the efforts made at the April G20 summit in London where world leaders committed to spur demand and reform the financial markets where regulation had failed.

“And this work will continue next week in Pittsburgh when I convene the G20,” he said.

The speech also called attention to the dangers of firms perceived as “too big to fail”.

“For a market to function, those who invest and lend in that market must believe that their money is actually at risk,” said Obama. “And the system as a whole isn’t safe until it is safe from the failure of any individual institution.”

“A core issue coming out of the financial crisis is that many of these financial institutions have become too big to fail and the market share of the biggest financial institutions in the past several years have grown hugely,” senior international economist at the Economic Policy Institute Robert E. Scott told IPS.

“That’s a huge problem and we haven’t come up with an answer to that yet. That may have to be dealt with domestically and internationally,” he said.

The Pittsburgh G20 summit will have a full agenda with the U.S. seeking serious commitments from the world’s leading economies on reforming their regulatory systems and a burgeoning trade war emerging between the U.S. and China.

On Friday, Obama signed an order imposing a 35-percent tariff on Chinese tyre imports which U.S. trade unions claim have “surged” and put 7,000 factory workers out of work.

Chen Deming, China’s minister of commerce, condemned the U.S. tariffs, saying that it “sends the wrong signal to the world” and “(n)ot only does it violate WTO rules, it contravenes commitments the U.S. government made at the [April] G20 financial summit.”

China has suggested that retaliatory sanctions on U.S. poultry and vehicles may be imposed.

How much the Obama administration’s new harder line with China will spill over into the G20 or bilateral cooperation on financial market reforms remains to be seen, but both countries have numerous shared political interests – particularly working to contain North Korea’s nuclear ambitions – and in stabilising the global financial system as two of the world’s leading economies.

“The fact is these summits come up every year and are influenced by the stream of economic events that come along,” said Scott. “(The tariffs) may come up at the G20. The Chinese may feel they need to comment and look like they’re doing something for audiences at home but there are more fundamental long-term issues that need to be addressed in U.S.-China economic relations.”