Changing regulators or giving regulators additional power shifts more responsibility away from bankers and on to regulators. That is the opposite of wise policy. We should shift responsibility the other way.

The two most useful changes would be: (1) end too-big-to-fail policies that have been growing for 30 or more years (since First Pennsylvania, and (2) eliminate ALL government credit programs that are off budget, especially Fannie Mae Freddie Mac. Put the housing and other subsidies on the budget where the rules of democratic government say they belong.

Who knows more about the portfolio risk, the banker or the regulator? That tells us who should bear responsibility for controlling excessive risk-taking. Can anyone think of an example of the Federal Reserve acting in advance of a crisis?

Too-big-to fail is an invitation to moral hazard, and we have just seen irrefutable evidence that some (not all) accept the invitation. That means the profits go to the bankers, while they last. The losses go to the taxpayers. Regulators end up protecting the banks at the expense of the public. Terrible system!

Banks and holding companies should be required to increase capital more than in proportion to their increase in size. The benefits to the public from economies of scale and scope are much smaller than the losses the public incurs under too-big-to-fail.

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The Chamber has called for comprehensive reform of the regulatory system since well before the financial crisis. In short, while there are positive elements to the Obama plan, we are concerned the proposal simply adds new regulatory agencies and sweeping new authorities, without addressing the fundamental and underlying problems of an outdated regulatory system.

The Chamber supports stronger and more comprehensive oversight of the financial system to identify risks to the system and the right actions to mitigate them. However, we don’t support a new systemic authority that will duplicate regulation by existing authorities, or that will designate institutions that are systemically significant, and therefore carry an explicit or implied guarantee that significant losses at those firms will be socialized to the taxpayer. Creating the perception that certain firms are safer investments or creditors creates competitive imbalances among all firms and erodes the critical role of market discipline.

The Obama plan fails to meet either of these tests – it both drastically expands the Fed’s regulatory authority over financial holding companies and their subsidiaries, and requires that specific firms be designated as systemically significant.

In regard to Resolution Authority, we agree that we need a more orderly process for the unwinding of our largest financial institutions. We are open to mechanisms that will enhance that process, but we need to be cautious about extending unprecedented authority to seize institutions. We will only support resolution authority if it is narrowly tailored to achieve the orderly bankruptcy and dissolution of firms, and not to establish sustained mechanisms for government intervention in the private economy.

Lastly, we agree with the Administration that we need to enhance consumer protection. However, we feel the right way to protect consumers is through effective regulation, disclosure that is understandable and concise, consumer education, well-disclosed choices, and enforcement of the laws to deter and punish illegal and predatory activities. We should address where regulatory agencies have failed, rather than assume that a new agency is the silver bullet for enhanced consumer protection. Product-by-product approval by a regulator that does not have the full authority or expertise about the underlying financial institutions and its products is neither pro-consumer nor effective. It divorces product regulation from other regulatory goals such as safety and soundness, is a formula for disaster and only creates more gaps.

At the end of the day, the Chamber will strongly support regulations that will make the regulatory system more effective. The administration’s proposal is only the first step. We look forward to working with Congress to achieve real reform that will spur the efficient capital formation needed to secure real long-term economic growth and job creation.

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Barack Obama’s announcement today, if implemented, will represent significant change for financial regulation in the US. At first sight, three aspects are particularly important. First, the “systemic” authority given to the Fed has the potential of closing the many loopholes that existed in the previous system. What remains to be seen is how aggressively the Fed will exert this authority, and whether it will clash with its monetary policy mandate and independence. Second, the resolution authority is an important new development and will greatly facilitate the management of future crises, even though it also comes with its own practical difficulties. Third, the creation of the Consumer Financial Protection Agency will enable stronger enforcement of consumer protection principles which have not been well defended in the recent past. It will also usefully clarify the split of responsibilities among financial regulators, and reduce confusion of consumer protection objectives with ones of financial stability or market integrity.

Seen from Europe, the Obama plan contrasts favorably with the piecemeal and reactive approach adopted in the European Union so far. Of course, the comparison between the US and EU create a false symmetry, as the starting points and gaps are so different: the US suffers from functional fragmentation of financial regulators, while in Europe the fragmentation is primarily geographical with the near-absence of federal regulatory and supervisory authorities which have existed in the US for many decades. But, as has arguably already been the case with the stress tests, this episodes again illustrates that while the US generated this financial crisis, it also currently has a better-quality (if far from perfect) policy elaboration process than the EU to remedy it.

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        Conservatives are already fretting that President Obama’s concerns will lead to “socialist” interference in the financial free market. Their complaints can be dismissed for what they are: the desperate rhetoric of the proponents of a laissez-faire ideology that has now been discredited by its excesses.   

        But Wall Street is also issuing ominous warnings that over regulation of banks, hedge funds and investment houses will cripple the economy’s recovery. Needless inhibition of financial innovation, the argument goes, could kill the goose that might one day again lay more golden eggs.

        Such worries are transparently self-interested and, more important, at odds with recent experience with financial innovation.

        The benefits of financial innovation have been grossly over estimated by those who immediately stand to gain from their immediate use, while the long-term costs to the public of faulty financial tools have been ignored and have turned out to be enormous.

      Moreover, innovative financial products, such as credit default swaps and collateralized debt obligations, were supposed to more efficiently spread risk among multiple investors, expand the country’s capital stock, promote more productive use of capital and stimulate economic growth.

        Butit didn’t work out that way.Between 2003 and 2008, the amount of over-the-counter derivatives around the world increased by 300 percent and the amount of derivatives held by the 25 largest American commercial banks rose by 170 percent. But the amount of gross fixed capital in the United States increased by only about 25 percent, as Adam Posen and Marc Hinterschweiger of the Peterson Institute for International Economics, have pointed out.

        In addition, , financial innovation was sold to an unsuspecting public and asleep-at-the-switch regulators because, in particular, it was supposed to increase the availability and decrease the price of the capital available to manufacturers and farmers. But it turns out that only 11 percent of all the users of over-the-counter derivatives were nonfinancial entities. It seems financial innovation was primarily used for Wall Street self-dealing.

        It is not self-evident that the proposed Obama administration reforms will address these problems.

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Early on in the Obama administration, there were encouraging signs that his economic team was pursuing true regulatory reform and modernization, consolidating and combining functions of key financial agencies and moving away from the "more is better" approach to regulation that had been followed even in some Republican administration in response to a crisis. Even this week, administration officials Tim Geithner and Larry Summers wrote in a Washington Post op-ed that the current "framework for financial regulation" contains "jurisdictional overlaps, and suffers from an outdated conception of financial risk.

Initial reports indicate, however, that these early hopes of a more accountable regulatory structure have been dashed. What the Obama administration is likely to put forward will do little to address the "jurisdictional overlaps" cited by Geithner and Summers. It leaves the status quo among regulatory agencies largely in place, and only adds additional layers of "systemic" regulation from "super" agencies such as the Federal Reserve. This new mountain of red tape could choke many small businesses, the engines of economic recovery, and do little to prevent the next crisis.

The new Obama regulations should be also be viewed in light of another systemic issue in the economy: stimulating innovation. A recent Business Week cover story reports that "there's growing evidence that the innovation shortfall of the past decade is not only real but may also have contributed to today's financial crisis." If financial regulation chokes off financing for entrepreneurial firms in technology and other sectors, as the Sarbanes-Oxley accounting mandates have already done to a great extent, the economy could suffer the systemic effects of stagnation.

As details of the Obama plan emerge, CEI analysts will have more detailed assessments of the specific proposals. Here are some general thoughts on some of the key concepts of what's likely to be proposed and important facts in the regulatory debate.

1.  The George W. Bush presidency was not an era of deregulation, but overregulation and failed financial supervision.

In 2002, Bush signed the Sarbanes-Oxley accounting legislation, the biggest expansion of securities regulation since the New Deal. The law had a slew of unintended costs and effects, such as reduced numbers of stock offerings and the tripling of auditing costs for smaller public companies, that led even Democrats such as House Speaker Nancy Pelosi and Sen. John Kerry to criticize some of its provisions. A Brookings-American Enterprise Institute study found that the law has cost the U.S. economy more than $1 trillion in direct and indirect costs, and the Supreme Court recently said it will hear a constitutional challenge to Sarbox in a case in which CEI attorneys are serving as co-counsel. However, as costly as it was, Sarbox failed at its intended goal of providing more meaningful accounting information about complex financial instruments such as derivatives and mortgage-backed securities, and did nothing to lessen the current financial crisis 

The Bush administration greatly increased overall regulation as well. As CEI vice president for policy Wayne Crews points out in his study "10,000 Commandments," the Bush administration increased the total cost of regulation to $1 trillion per year in 2007 and the number of pages in the Federal Register to more than 70,000. These did not seem to have much of an impact of financial fraud and systemic risk either.

2. Regulatory "gaps" and "arbitrage" are often caused by overregulation. Lessening excess rules on the more regulated entity should be a priority.

President Obama and others speak often of "gaps" in the system whereby more heavily regulated entities such as banks are passed over in favor of less regulated vehicles such as hedge funds, private equity, and various methods of securitization. And the answer always seems to be to "level the playing field" by adding rules for the lesser regulated entities.

Yet there is another way to level the field that would achieve many of the goals of transparency and boost economic growth at the same time: Loosen the red tape on the more regulated entities. Excess regulations are often the reason for firms going to the so-called "dark corners" of finance. Smaller public companies delisted themselves from stock exchanges and were acquired by private equity firms because of the accounting mandates from Sarbanes-Oxley, which even Democrats agreed went too far. Similarly, overly strict capital standards, such as those embodied in the international Basel agreements and in the wake of the savings-and-loan crisis in the '90s, discouraged traditional savings institutions form carrying mortgages on their own books and helped give rise to complex mortgage securitization.

Simplifying red tape on the more heavily regulated banks, credit unions and public traded companies -- instead of, or in addition to, tighter regulation of the newer financial entities -- would bring more financial activity in the light while reducing the chance of negative affecting economic recovery.

3. Capital requirements shouldn't necessarily be raised, but revised with more accurate measures of financial assets. Put less reliance on mark-to-market accounting rules that accelerate booms and busts.

In their Washington Post op-ed, Geithner and Summers speak of "raising capital and liquidity requirements for all institutions." But what is really needed is more accurate measures of capital. Mark-to-market accounting, utilized by both the SEC for investor disclosure and by bank regulators to measure solvency, has been shown to be pro-cyclical -- overstating the value of financial assets during a boom and understating them during a bust. Also, in the current crisis, mark-to-market mandates put fuel on the proverbial fire by requiring healthy banks to mark down thinly traded assets such as mortgages-back securities to fire sale prices, even if the loans in question were still being paid and showed little signs of default. Members of Congress and economists on both sides, from conservative Steve Forbes to Obama stimulus champion Mark Zandi, have criticized mark-to-market for making the crisis worse.

Capital measurements should be based, for the most part, on financial instruments' cash flow and expected default rates. Mark-to-market valuations should not be utilized for thinly traded assets, for which there does not exist much of a market. The Obama administration's stress tests, which largely disregarded mark-to-market in measuring financial assets and led to healthier banks returning bailout money, would be a good example to follow in setting capital requirements.

4. The proposed Financial Product Safety Commission is paternalistic and could undermine regulation for systemic risk.

One of the proposed elements of the Obama administration's plan is a new financial agency based on the Consumer Product Safety Commission (CPSC), to potentially ban financial products it deems "unsafe." But financial products are not power tools, and their "failure" for one set of consumers does not justify restricting their availability to consumers they could potentially help. It should be noted that the CPSC itself has recently come under bipartisan fire for rules that could ban the sale of used children's clothing that contain minute amounts of lead. In both consumer and financial products, the focus should be on banning fraud and improving public education to prevent misuse, not on limiting consumers' choices.

Moreover, a banking agency devoted exclusively to consumer protection could develop myopia and ignore overall risks to the financial system, the very purpose of the Obama plan. For instance, limits on risk-based pricing seen as beneficial to consumers could lead an overall lack of credit availability or system-wide losses based on misprice risk.

5. "Resolution authority" to seize non-banks could lead to politicized bankruptcies such as GM and Chrysler.

The Obama administration wants resolution authority to seize non-bank "financial institutions" that the government deems a systemic risk, similar to the government's current power to take over troubled banks. But this would give the government too much arbitrary power to confiscate what could be a broad array of businesses. In statutes such as money laundering, "financial institution" is defined broadly to cover businesses unrelated to banking such as jewelry stores, travel agencies and auto dealers. The system for seizing troubled banks isn't perfect, but it can be said that banks and their stockholders consent to this process by purchasing deposit insurance. In the case of other businesses, there is no such service the government provides to justify this confiscatory power.

Moreover, giving resolution powers to an administrative agency, rather than a bankruptcy court, could lead to a politicized process. As in the Obama administration's bankruptcy reorganizations for Chrysler and General Motors, certain constituencies could be favored, while bondholders and secured lenders could see their contractual rights ripped apart. This could lead a greatly reduced investment in the American financial system.

In conclusion, if President Obama wants to be the pragmatist he says he is, he would lessen burdensome and ineffective mandates such as Sarbanes-Oxley even at the same time he was tightening regulation over other entities such as credit default swaps. But the plan likely to be unveiled today is simply "more of the same" overregulation Americans experienced under the Bush administration.

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The plan calls for enhanced monitoring and supervision of too-big-to-fail institutions, and sets out an orderly procedure to bring them through a bankruptcy when/if they do fail, but it does not question their existence or seek limits to their size and/or complexity.  This is a missed opportunity to seriously engage in a discussion about the concentration of financial assets in a relatively few corporate hands -- a discussion that the public and many institutions, including small banks, are ready to have. Certainly, all of the suggestions are good and worth doing -- who would argue against closing regulatory loopholes, protecting consumers and making sure that institutions hold on to enough capital to reasonably cover their bets? -- but they are modest. One can hope the proposals will grow tougher as they move through Congress, but given the financial sector's determined lobbying, that is probably unlikely.

This is a disappointing announcement, with one exception. Most of the proposals here have been watered down by financial industry lobbying -- very little here amounts to fundamental change. It's bubble-inducing business as usual for the financial sector going forward; quite a sad day. The only exception is consumer protection -- if the proposed agency gets real teeth, that will help protect people as consumers. But as investors and taxpayers, our worst days still lie ahead.