Improving consumer protection is a less vital factor in the reform package. It focuses on ancillary issues such as predatory lending and credit card interest. Improving protections may help to reduce the incidence of consumer bankruptcy, but has two negative consequences. The first is that the illusion of protection can encourage increased risk-taking behavior among consumers. The second is that increasing consumer protection fails to address the underlying issue, which is the atrocious level of financial literacy among the general population. These reforms, therefore, may not be effective.
The fourth set of reforms addresses the ability of government to respond to the crisis. The Federal Reserve's involvement in stabilizing the financial industry may have been needed at the time, but is inappropriate in the context of the Fed's tradition role. Furthermore, the FDIC has been forced into desperate action as its reserves have run low in the face of 100+ bank failures this year alone. The specifics of this reform have yet to be revealed. It is intended to provide a third option to bailout and collapse. Anything that prevents further bailouts should be considered good.
Wall Street is opposed to the majority of these reforms. However, the industry understands that some punishment is coming in the wake of the recession. They support Obama and Congress, but are unlikely to withdraw their support in light of these recommendations. Indeed, a Republican administration may have initiated similar reforms.
Consumers gain from these reforms, and they will view the efforts as necessary. It is poor optics to appear to go soft on Wall Street so if anything these reforms will be viewed as weak, despite industry opposition. Going after seemingly irrelevant targets such as credit card companies may do little to avert future meltdowns, but will score well with the public. Enhancing the ability of the federal government to manage such crises in the future is a strong component of Wall Street reform, and one that does not have a negative impact on any key group.
Overall, we should support the President's efforts to reform Wall Street. The reforms likely do not go far enough, but will be received well both by an industry bracing for the worst and by consumers who are angry and want protection from these types of crises in the future.
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