With hardly time for a breather after the hectic healthcare debate and the signing of the new healthcare law, Americans are subject to another passionate debate. This time over financial regulatory reform based on a bill proposed by Congressional Democrats, and crafted by the U.S. Senate Banking Committee under its chairman, Democratic Senator Christopher Dodd. The bill is currently poised for debate in the U.S. Senate, but is strongly opposed by Republican senators.

What exactly are these reforms and what do they mean to the average American? Similar to providing its readers with comprehensive information related to healthcare reform, the National Weekly, beginning with this issue, will provide its readers with information relevant to the proposed reforms for regulating the nation’s financial system.

Background

Since mid 2008, Americans have experienced the most severe financial crisis (recession) since the Great Depression of the 1930s. Several economists have referred to the continuing financial crisis as the Great Recession.

The financial crisis is evidenced by continued unemployment, home foreclosures, declining property values, failing banks and businesses, the cessation of credit, declining savings and retail sales. At the core of the crisis in late 2008, financial institutions once regarded as pillars of America’s financial system failed, requiring the government to bail them out with billions of taxpayers’ dollars.

Despite the government’s intervention, and some signs of economic improvement, the crisis still lingers, creating challenges especially for small businesses and consumers.

A host of economists and the current federal government are convinced that the problems leading to the financial crisis were imbedded in the nation’s recent past, when a buoyant economy and relatively deregulated system led financial institutions to take irresponsible risks to maximize their significant profits. Not surprisingly, the risks reached a point of diminishing returns, especially related to the once booming housing sector, where Americans were offered mortgage loans at unrealistic terms that most could not adhere to.

The camouflage of strength in the nation’s financial sector eroded, and the system cracked and crashed when the hidden, weak (and often corrupt) credit underwriting standards were exposed.

In several financial institutions there was a huge disconnect between risk management systems and the complexity of the new financial products. This was associated with a lack of transparency. Many borrowers did not understand the steady decline in standards for secured loans, and some loan processors did not understand the reason for increasingly lax underwriting standards. The financial firms gave very little explanation.

Increasingly, reports from credit rating agencies became the primary criterion on which credit was made, while other criteria were more or less ignored. Householders were elated in finding access to credit easier. However, very little, if any attention was paid to protecting the consumer against unscrupulous financiers, and to insure them against the likely inability to repay the unrealistic credit they received. The result: too many Americans got loans they neither understood nor could afford.

The Obama Administration is of the opinion that the crisis could have been averted if former governments had enforced regulations that would have remedied weaknesses in the operations of financial institutions, and address risks identified in the financial system.

The Proposed Bill

To correct the irregularities, the government has proposed the Financial Regulatory Reform bill, “To restore confidence in the integrity of our financial system… to reform our financial regulatory system and put our economy on track to a sustainable recovery… build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation, and that is able to adapt and evolve with changes in the financial market.”

The bill proposes five key objectives:

(1) Promote robust supervision and regulation of financial firms. Ensuring that financial institutions that pose risks to the financial system are regulated.

(2) Establish comprehensive supervision of financial markets. Ensuring the nation’s financial markets are strong enough to withstand both system-wide stress and the failure of one or more large institutions.

(3) Protect consumers and investors from financial abuse. Creating more effective oversight of financial services and investment markets, including the creation of a new Consumer Financial Protection Agency.

(4) Provide the government with the tools it needs to manage financial crises. Ensuring faster, more effective means for the government to address future financial crises.

(5) Raise international regulatory standards and improve international cooperation. Giving the government more leverage to protect the American financial system from international financial crisis.

Next week: Details of the proposals to address these five objectives of financial regulatory reform.