WASHINGTON — President Barack Obama moved Wednesday to shift the pendulum of history, proposing sweeping new government regulation of the nation's financial system and turning sharply away from the anti-government, pro-free-market passion that's dominated American politics for three decades.
Obama's proposal to overhaul the nation's financial regulatory structure would reverse the prevailing free-market sentiment in Washington and the country that started with Jimmy Carter in the late 1970s, accelerated with Ronald Reagan in the 1980s and continued well into this decade.
In so doing, Obama sought to built a new regulatory structure to meet the demands — and the schemes — of a new age, much as Theodore Roosevelt did at the dawn of the 20th century and Franklin Roosevelt did in response to the Great Depression of the 1930s.
Obama would, for example, apply federal regulation for the first time to complex financial innovations such as hedge funds and derivatives, and demand tough new standards for financial institutions that have grown so big that taxpayers have had to bail them out lest they drag down the world economy.
Digital Access for only $0.99
For the most comprehensive local coverage, subscribe today.
The president's plan also calls for giving the Federal Reserve greater power over big financial institutions and creating a Consumer Financial Protection Agency to guard against abuses in mortgages and credit cards.
Obama said that dramatic measures were necessary after the economic crisis that's rocked the country and the world, a crisis that he said revealed the government as woefully unprepared for a fast-changing financial system.
"A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th-century economic crisis, the Great Depression, was overwhelmed by the speed, scope and sophistication of a 21st-century global economy," he told members of Congress, financial regulators and interest groups in the East Room of the White House.
"My administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."
He tacitly acknowledged the shift back toward government.
"There's always been a tension between those who place their faith in the invisible hand of the marketplace and those who place more trust in the guiding hand of the government," he said.
He said that he believed in the free market as the engine of economic growth, despite his record $787 billion program of government spending and tax cuts to stimulate the shrinking economy and create jobs.
"I've always been a strong believer in the power of the free market. It has been and will remain the engine of America's progress, the source of prosperity that's unrivaled in history," he said.
However, he also said that the government must regulate markets to ensure that insiders didn't abuse the system or expose the entire economy to fallout.
"We are called upon to put in place those reforms that allow our best qualities to flourish while keeping those worst traits in check," he said.
Republicans came out swinging against new government regulation as a job-killing burden on business.
"The American people don't want Washington to get more involved in the private sector," said Rep. John Boehner, R-Ohio, his party's leader in the House of Representatives. "This plan may slow down job growth at the time that families and small businesses across America need it most."
"We need smart regulation, not necessarily more regulation. The administration has placed too much emphasis on government and too little on people," said Rep. Eric Cantor, R-Va. "Further empowering the same regulators who presided over the market breakdown is not intelligent."
The reaction from business groups and others was more mixed.
The influential U.S. Chamber of Commerce was particularly displeased with Obama's proposal to create a Consumer Financial Protection Agency, which it said "cannibalizes regulatory expertise and adds yet another regulatory layer."
The Securities Industry and Financial Markets Association called the proposal an important first step, however. "We have a once-in-a-generation opportunity to rebuild our regulatory structure so that our financial system is more stable, more resilient and better underpins a dynamic U.S. economy," said Tim Ryan, the group's president.
The Mortgage Bankers Association, which represents the lenders whose poor underwriting triggered the financial crisis, was generally supportive.
"We will work with Congress and the administration to ensure that the new regulatory structure does not create conflicting and contradictory regulatory regimes that further confuse both lenders and borrowers," said John Courson, the group's president. "We will continue to argue for one pre-emptive set of mortgage regulations throughout the country to replace the current patchwork of state and local laws."
Liberal groups largely welcomed the Obama plan, but they also found room for improvement. The Center for Economic Policy and Research, for example, said the proposal assumed that lapses and gaps in the regulatory system had caused today's problems, not mistakes by the regulators themselves.
"The basic story of this crisis was not that the regulatory authorities lacked the ability to rein in this disaster before it was too late. Rather, the regulators — most importantly the Fed — opted not to use their power to rein in the housing bubble," the group said.
Democrats said they'd start writing legislation next month, and they predicted approval by the end of the year.
"There will be debate about the details, but I think we're all seeking the same results," said Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee. "We'll have it done this year."
ON THE WEB
MORE FROM MCCLATCHY
Follow the latest politics news at McClatchy's Planet Washington