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Key regulatory reform

(China Daily)
Updated: 2009-06-19 07:46

Major foreign holders of US government debt like China would welcome the Obama administration's proposals unraveled on Wednesday for what could be the biggest financial regulatory reform since the Great Depression.

Though such a regulatory overhaul is far from enough for ensuring the safety of China's vast holdings of US financial assets, the proposals send an unmistakable signal that Washington is dead earnest about cleaning up a financial system riddled with loopholes.

If the United States acts without delay to reform its financial regulatory system and puts its economy on track to a sustainable recovery, China will benefit a lot, not only as the largest holder of US treasury bonds but also as a part of the world economy.

The Obama administration's program is aiming at building a new foundation for financial regulation and supervision that is simpler and more effectively enforced while protecting both consumers and investors within and outside the economy.

By imposing new regulators that see their job as protecting the economy and financial system as a whole, the reform goes to the root of the current financial crisis.

Years of deregulation and compartmentalization of regulatory agencies have largely blinded almost all regulators to the far greater systemic risk in the usually tough market.

A fundamental change in the way that big financial institutions and other too-big-to-fail companies are regulated is badly needed to restore confidence in the US financial system - a precondition for the economy to emerge from the current recession.

As a response to the most severe global financial and economic crisis in many decades, it is believed that such a regulatory overhaul, if implemented as envisioned, can make a huge difference in the future for preventing another such crisis.

However, while the US needs to overcome its domestic political differences over the regulatory reform proposals, its policymakers must keep in mind that this is just the first step toward reviving a system that has collapsed.

The reckless resort to leverage by US financial institutions is unlikely to be addressed any time soon even if proper regulatory measures can be put in place quickly. Enhanced government oversight will force market players to take less of a risk in the interests of their own health.

However, US policymakers should not expect that a sound financial system alone can automatically lift the economy out of recession.

Much more painful reforms affecting both consumers and companies are inevitable before the imbalances and excesses of the US economy can be fixed.

(China Daily 06/19/2009 page8)