This financial crisis was not inevitable. It happened when Wall Street wrongly presumed markets would continuously rise, and traded in complex financial products without fully evaluating their risks. Here in Washington, our regulations lagged behind changes in our markets -- and too often, regulators failed to use the authority that they had to protect consumers, markets and the economy. We now know from painful experience that we can no longer sustain 21 -- 21st century markets with 20th century regulations, and that while free markets are the key to our progress, they do not give us free license to take whatever we can get, however we can get it. But let me be clear: The choice we face is not between some oppressive government-run economy or a chaotic and unforgiving capitalism. Rather, strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors, and ultimately to keep those financial institutions strong. Not to stifle, but to advance competition, growth and prosperity. And not just to manage crises, but to prevent crises from happening in the first place, by restoring accountability, transparency and trust in our financial markets. These must be the goals of a 21st century regulatory framework that we seek to create.
I also liked his first reform principle, which addresses the implications of the "Too Big To Fail" problem:
financial institutions that pose serious risks, systemic risks, to our market should be subject to serious oversight by the government. And here's why. When the Federal Reserve steps in as a lender of last resort, which it's had to do repeatedly since this financial crisis began, it's providing an insurance policy underwritten by the American taxpayer. And taxpayers should be assured that the Fed thoroughly understands the institutions that it is effectively insuring and actively monitoring them to make sure that they're not taking risks that will cost taxpayers in the long term.And his fourth reform principle -- "we should base this oversight not on abstract models created by the institutions themselves, but on actual data on how actual people make financial decisions" -- seems to indicate some behavioral economics in his approach (which would make sense given the presence of Sunnstein, Orszag, Goolsbee, Liebman, etc).Hey, you know what this post didn't have? A thesis. Anyway, full speech after the jump.
