NEW YORK – A top economic adviser to the incoming Obama administration unveiled a plan Thursday to radically rethink the global financial system, including a host of measures that would dramatically expand government control over banking and investment in the United States.
The plan – which recommends limiting the size of banks, setting guidelines for executive pay and regulating hedge funds – offers the first hint of the kind of changes to the financial system President-elect Barack Obama might push for in the coming weeks and months. Obama has pledged to present a comprehensive series of changes to prevent a repeat of the current financial crisis before world leaders gather in London for a major economic summit in April.
The report was issued by the Group of 30, an organization of international economists and policymakers. But the recommendations were immediately seen by observers as a building block to an Obama plan because the lead author is Paul Volcker, the former chairman of the Federal Reserve during the Carter and Reagan administrations who will serve as a special Obama White House adviser. Part of Volcker’s role is to help mastermind what could ultimately be the biggest overhaul of the U.S. financial system in decades.
Volcker said he would press the new administration to consider the measures, “but it’s up to the administration to decide what they want to do.”
The proposal offers 18 major recommendations that would insert government regulators into the board rooms of financial institutions as never before. The plan recommends vastly increased oversight of major banks, going as far as to recommend the end of an era of mega-banks whose size makes their failure potentially catastrophic to the global financial system. To limit their size and scope, banks, the document states, should be prohibited from managing hedge funds or private equity funds.
In addition, major mutual funds should be required to operate as commercial banks, subjecting them to stricter government oversight. Those that choose not to comply should be forced to sell only relatively safe financial instruments offering investors low risk, and, most probably, limited room for outsized profits.
The document suggests that venture capital groups and rating agencies should also face a battery of government regulators.
“The issue posed by the present crisis is crystal clear: How can we restore strong, competitive, innovative financial markets to support global economic growth without once again risking a breakdown in market functioning so severe as to put the world economies at risk?” Volcker said in a statement. “We hope that our proposals, which explicitly relate to the weaknesses that have become evident in the financial system over the last year, will be a useful contribution to the debate about needed reforms both by private financial institutions and by public authorities.”
The proposal suggests that the U.S. government should clarify the status of mortgage giants Fannie Mae and Freddie Mac, either making them into government agencies or regulating them as independent mortgage brokers.
It remains unclear how many of the recommendations will ultimately make their way into Obama’s final plan, but the proposal could lift the spirits of Europeans who have called for stricter government oversight on executives’ pay and risk management in financial institutions – an area where the Bush administration has offered only tepid support. The report calls for government to enforce systematic board-level reviews for executive pay and the creation of new parameters for a firm’s risk tolerance.