Financial shake up a balancing act for Obama 

Source: ReutersUnited States President Barack Obama

US President Obama has described his package of financial reforms unveiled this week as the biggest shake up of financial regulation since the Great Depression.

It may well be, but you would not know it judging by initial reaction of the markets.

They hardly batted an eyelid, most of the key market players I suspect had a pretty good idea of what was coming...

At the centre of the Obama plan is a proposal to boost the powers of the US Federal Reserve so it can police large financial institutions as well as banks.

The aim is to prevent institutions getting to the point where they are too big to fail.

This is a direct reference to the huge bailout for the likes of Mortgage lenders Fannie Mae and Freddie Mac and Insurance giant AIG.

AIG remember had to be bailed out with billions of dollars of taxpayer's money last year, sparking great anger among many in the US.

The reason for the bailout was that AIG's tentacles were so widely spread around the world, it was feared that if it did fail it could bring down the world's financial system.

The Bank of England's Governor Mervyn King summed the issue up nicely when he said on Wednesday: "If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big."

Financial firms and hedge funds will also face new scrutiny and capital requirements, while consumers will get a new mortgage and consumer credit watchdog to look out for them.

Middle ground

President Obama is clearly walking a bit of tricky path here.

While he, like many in America, are still very angry about the failure of AIG and big investment banks like Lehman Brothers, he can't burden the free market with too many new regulations, through fear of trampling down an already weak economy.

This is how the President couched the plan on Wednesday...

"We are called upon to recognise that the free market is the most powerful generative force for our prosperity - but it is not a free license to ignore the consequences of our actions."

The initial reaction I've seen from media in US suggests he may well have struck an achievable middle path.

Bankers and Republican politicians are saying it is going too far and will restrict growth, but others, as Obama himself pointed out, are likely to feel he should have been tougher.

Ultimately this package of reforms has to be a good thing. We need stability in the world's financial markets and this hopefully will provide that and some much needed transparency.

The regulators so often accused of being 'asleep at the wheel' should now be better equipped to do their jobs....

Of course the regulations still need to pass through the political process in the US and it could yet change; with some law makers taking particular aim at proposals which will give the Federal Reserve more power.
 
So let's see how they look in six months time before we finally pass judgement.

For New Zealand the direct market impact will be limited.

However, if they do lead to a more stable financial system and similar reforms are implemented in Europe and elsewhere, then that should be good for us.

While we were not directly exposed to the sub prime crisis the shock waves have hammered our economy and that of our key trading partners.

The US needed to take some action. This looks like a reasonable first step.