Efforts to improve U.S. financial regulation are seen to be accelerated early next year, as a new Congress and administration seek to protect public money put at risk by recent rescue measures. (see the case of Fannie Mae and Freddie Mac).
The Federal Reserve’s extension of emergency credit to the big US investment banks (which effectively is an interest-free loan to those institutions) and fears of a deeper decline in home prices, will drive calls for reform in what is expected to be a Democratic-led Congress. Some analysts say that the fate of a possible worst 30 years recession is now in the hands of the Americans, who will vote with their housing purchases. Whether they trust or not the system is going to be seen the next three months, some analysts said.
Major changes would also allow a new administration, whether the president is Democrat Barack Obama or Republican John McCain, to distance themselves from the current government and the mess left behind by the credit crisis.
“For the Democrats, this really hits on all cylinders for them,” said Andrew Busch, a BMO Capital analyst who has advised McCain. “They want to re-regulate the financial industry.”
A U.S. Treasury Department “blueprint” for reform was conceived under the Republican administration of President George W. Bush and Treasury Secretary Henry Paulson at a time when the pendulum was swinging towards less reform.
But by the time it was issued at the end of March — just after the Treasury and Fed’s emergency sale of investment bank Bear Stearns to JPMorgan — the atmosphere had been transformed. Banking regulators are now more likely to face criticism for doing too little and being asleep at the wheel rather than being too strict.
Few expect the 218-page document to be the roadmap to eventual changes, though the proposals to create a “market stability regulator” and cut the number of bank regulators have broad appeal.
Other ideas, like merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, have been floated before in Washington and not gone forward. This time it might not be any different.