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Obama’s Parting ‘Gift’ To The Financial Industry

March 31, 2016

By Peter J. Wallison

A White House meeting which took place in early March could have wide-ranging implications for the future of U.S. financial markets. Although regulators are supposed to be independent of the president and his policies, all principal federal financial regulators were summoned a few weeks ago to the White House to meet with President Barack Obama about the implementation of the Dodd-Frank Act. In the past, Obama has ignored appearances of impropriety and has successfully pressed regulators to follow his policies. This most recent meeting should be taken as a warning sign for the financial community that it will face serious new regulatory challenges before the end of the Obama administration.

Before the meeting with the president, the Fed prepared the way for strict new regulations on banks, proposing to limit interbank lending to 15% of capital. This applies to banks the erroneous Dodd-Frank notion that interconnections between financial institutions caused the breakdown and panic in 2008. In reality, despite the chaos that ensued after Lehman’s bankruptcy, no other large financial institution failed because Lehman could not meet its obligations. The Fed’s action, however, signals that Dodd-Frank will be used aggressively in the months ahead to cement in place President Obama’s regulatory legacy.

But this is only the beginning. There is a real danger that prudential regulation — in which regulators control credit allocation and risk-taking and impose capital requirements — will be extended to the rest of the financial system. In effect, under the guise of creating “stability,” a prudential regulatory system will replace today’s unfettered financial market with a regulator-managed market in which risk-taking is controlled by the government.

Read the full article at Forbes.com: Obama's Parting 'Gift' To The Financial Industry

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