Chances are that if you have an IRA or 401K account, the statements have not been very appealing in recent months. I started investing consistently while the Dow rode the waves above 14,000. Two months ago, my portfolio was down over 40% and has only rebounded slightly since. Thankfully I have another 30 years of work ahead of me before I will even consider retirement, but for the millions of Americans that are retired, or for the boomers who are closing in fast, the “golden years” have lost a lot of their luster.
President Obama on Wednesday delivered a much anticipated speech that highlighted the administration’s plan for financial reform. Obama first summarized the global recession as “not the result of one failure, but of many,” that evolved over the course of “decades.” Obama pointed to the lack of regulation on Wall Street in recent years, combined with the creation of sophisticated financial instruments as the driving factors that systematically obliterated the global economy in the 21st century.
Obama continued painting a grim picture that described the rise of predatory lending. Blinded by greed, banks and financial institutions perpetually lowered their borrowing standards and sold mortgages and other loans with the knowledge in advance that people wouldn’t be able to repay down the road. These schemes in the President’s words, “were based on piles of sand,” which quickly unravelled, and the end result has been the failure of some of the world’s largest financial institutions, the loss of millions of jobs, and widespread evaporation of consumer confidence and the credit to keep the economy moving.
Obama’s plan for revamping the financial system is receiving mixed reviews. Some of the proponents are hailing it as “sweeping reform.” Others are quick to point out that it lacks the teeth to make any difference. Here is a quick rundown of what the President suggests.
First, Obama made it clear that the administrations does not intend to wipe out the current system. The President strongly supports the free market and contends that jobs are best created by businesses and not the government. In order to achieve this goal, Obama is suggesting that the Federal Reserve be granted new authority and accountability to regulate not only banks, but other holding companies, insurance and reinsurance companies as well, so that a single company like AIG won’t have the potential to sink the entire financial system again. The cornerstone of this regulation will revolve around aggressive capital and liquidity requirements for these institutions.
Second, Obama is calling for the creation of a new government agency that will look to protect consumer interests. This new agency will work to enforce new credit card regulations and ensure that lenders stop offering products that take advantage of consumers — complex products with loads of fine print. The agency will work to eliminate bad mortgages by requiring terms to be transparent, clear, and concise.
Third, Obama wants to eliminate the Office of Thrift Supervision. This government organization has been blamed with overlooking the fundamental financial principles that led to the failure of AIG, the problems with Goldman Sachs and Lehman Brothers as well as the hosts of other regional and national banks.
Lastly, Obama tied his speech together by appealing to average Americans who can no longer send their sons and daughters to college, have lost their homes, or are retiring with their life’s savings that have all but disappeared. Obama reiterated that it was no longer acceptable for millions of people to pay for the greed of a select few.
On the surface, many of Obama’s suggestions seem good, but the initial response to the President’s speech has been extremely varied. On one hand, some economists suggest that increased regulation will only add undue burden to an already stressed financial system. Increased regulation could drive banks to move operations to countries with less oversight. How will these new regulations be paid for? The answers do not seem clear. On the other hand, some economists suggest that simply adding these new regulations to a fundamentally flawed system will only postpone failure. They claim the president’s proposals don’t go far enough and that we need to rebuild the banking system from scratch.
Whatever side of the issue you land on, one thing is abundantly clear: None of these proposals will fix the economy overnight. The unintended consequences of credit card reform will likely come at the cost of higher interest rates and annual fees. The American dream of owning a home will be increasingly difficult to attain, and the gap between rich and poor will continue to widen. President Obama’s proposals will have to endure weeks of compromise in Congress. Additionally, because certain economic indicators such as housing starts and factory orders have picked up in the last couple of months, there seems to be bipartisan opposition to implementing sweeping reforms in Washington. I may be painting a dismal scenario, but it seems to me that we might be missing out on a crucial crossroads in our history as a nation. The need for reform seems to be abundantly clear, but the roadblocks to achieving real results seem to be mounting every day. So for the time being, keep running those 401K statements through the paper shredder, and let all of the working class keep its fingers crossed to better days ahead.
[kml_flashembed movie="http://www.youtube.com/v/CHpnfif8MfI" width="600" height="344" allowfullscreen="true" fvars="fs=1" /]
Dave Baldwin is a businessman, musician, and divorced father of two boys. They live together in El Paso, TX.