Tuesday marks President Obama's last State of the Union address. It is a time to reflect on past achievements and to focus on the unfinished work that still lies ahead.
In the wake of the financial crisis, President Obama saved the United States from another Great Depression and enacted sweeping reform of the financial sector. But we need to keep pushing harder to make the financial system safer, fairer and better harnessed to the needs of the real economy.
In the past, the financial system has contributed to inequality and retarded equitable growth, rather than facilitating it, in five key ways:
1) In the lead up to the financial crisis, managers of firms benefited from excessive risk-taking, while in the wake of the crisis society at large paid for that excess.
2) Weak consumer and investor protections and exploitative financial products contributed not only to individual abuses but also to broader economic dislocations from the resulting bust.
3) The structure of financial products and services often has generated huge fees while reducing the opportunities for households to save, which dramatically limited their opportunities to invest in human and financial capital that would improve their long-run prospects and contribute to domestic savings.
4) Minority and female entrepreneurs, who start out with lower income and wealth, have had more difficulties accessing finance to sustain and grow their business.
5) Power concentrated in the financial sector has helped to entrench finance-favored tax and regulatory policies and to reduce the ability of democratic processes effectively to address necessary reforms.
There has been progress under the Dodd-Frank Act and global reforms in tackling many of these problems, but much more work needs to be done.
Dodd-Frank and global rules are increasing the amount of capital the largest firms have to hold, with a higher capital surcharge, and in the U.S., higher capital requirements for firms that rely more on short-term debt. But even higher capital requirements would be prudent, as well as an explicit tax on the use of leverage, especially short-term funding such as repo, to offset the moral hazard that comes from essential government liquidity provision in a crisis.
Dodd-Frank puts a cap on the relative size of the largest firms, blocking mergers or acquisitions when a firm hits the cap. These could also be tightened further. New liquidation procedures under Dodd-Frank require a firm's managers, shareholders, and long-term debt-holders to bear the losses of a firm's failure, not taxpayers. Living wills, structural reforms and total loss absorbing capacity requirements are making firms more straightforward to resolve. But who will hold the long-term debt and how will knock-on effects be managed?
Building on these reforms, we need further effective steps to regulate the shadow-banking world and curb the use of hot money, including strong collateral and margin rules for securities financing transactions that expose the system to significant risk, and further money market fund reform to reduce the risk of another "bank" run or $3 trillion guarantee in that sector in the next crisis.
We need to curb abusive high-frequency trading practices, bolster protections for exchange traded funds and make our markets more transparent and fair, including by tackling conflicts of interest that too often leave regular investors exposed to unnecessary risks and fees.
We need accountability at the top. So, senior managers should suffer losses on their own compensation when their firms fail to meet capital standards or are hit with fines or penalties. And the SEC needs to use its new authorities to fine credit rating agencies that bend their analysis to meet the desires of Wall Street.
The Consumer Financial Protection Bureau, already saving Americans $12 billion a year in credit card costs, according to independent research, needs to be strengthened and supported, not attacked at every turn. One key step is barring the kind of arbitration clauses in consumer finance contracts that prevent consumers from banding together to get their day in court.
Financial innovation needs to focus on new ways to help families cope with their volatile income and expenses and make it easier (and less expensive) to build a financial cushion to make it every day. We also need to stop abusive small business lending practices and instead expand access to capital, skills and business opportunities under the State Small Business Credit Initiative and similar efforts.
We need to attack the role of money in politics if we are ever to enact these essential reforms.
The financial system is much safer and good bit fairer than it was seven years ago. But that is not enough. We need to keep fighting for a financial system that works for all of us.
Commentary by Michael S. Barr, the Roy F. and Jean HumphreyProffitt professor of law at the University of Michigan Law School, and a senior fellow at the Center for American Progress. As Assistant Secretary of the Treasury forFinancial Institutions, 2009-2010, he was a key architect of the Dodd-FrankAct. Follow him on Twitter @Michael_S_Barr.
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