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Busch: Back to the 1930s

With much fanfare and questionable outcomes, the Obama administration releases its plan to re-regulate the financial industry . The 85 page document has 5 main areas of new rules for the markets.

1. Promote Robust Supervision and Regulation of Financial Firms.

2. Establish Comprehensive Regulation of Financial Markets

3. Protect Consumers and Investors from Financial Abuse

4. Provide the Government with the Tools it Needs to Manage Financial Crises

5. Raise International Regulatory Standards and Improve International Cooperation

As I wrote back in March, the proposal creates a national super-regulator for financial institutions that would make it difficult for "supervisory shopping" and attempt to coordinate activities with other agencies to eliminate the risk of another AIG. From a power and regulatory standpoint, the US Federal Reserve is the big "winner" as it's empowered to review any financial company from top to bottom including foreign subs. This power extends to any commercial company that owns a banking charter.

Hedge funds would be required to register at the SEC along with other private pools of capital. The WSJ reports that , "Thousands of financial institutions would be required to hold more capital in reserve to protect against unexpected losses, and companies would also have to retain a portion of the credit risk for loans they have packaged into securities."

Lastly, the plan wants to create an new regulatory body to oversee consumer financial products. The Consumer Financial Protection Agency or CFPA would have broad powers to regulate all aspects of the sector from mortgages to credit cards to bank accounts. While President Obama has expressed his desire that this new agency not regulate interest rates on credit cards, I would imagine it would be difficult to control once it gets into operation. Mortgages, home equity loans, debit cards, and credit cards would all come under some committee in Congress and have sweeping authority to set rules.

Given the massive disruptions that have occurred in the financial markets, the urge is to create an entirely new structure instead of fixing/reforming what is already in place. With every new agency that is created, Congress reaches deeper and deeper in the functioning of the private sector. The CFPA will be a massive new agency that will impact everyone in the United States in some form. Providing this much power to one agency is truly frightening as they will get to set the rules and pick the winners/losers for the financial sector.

More importantly, they get to decide for you what products and services you'll receive and what they'll cost.

Here's one more thing to ponder: regulation means less supply. Less supply means higher prices. Higher prices mean the winners will make more money. This is exactly what the New Deal did when the government tried to set industrial prices and attempted to cartelize the US economy.

I guess those comparisons between FDR and Obama are more accurate than we realized.....

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Andrew Busch
Andrew Busch

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter at http://twitter.com/abusch .