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Obama Steps Up

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For the past six years, Barack Obama's administration has, more often than not, sided with the interests of big banks on financial-sector policy. But this week, announcing a new proposal to prevent conflicts of interest in financial advising, Obama seemed to turn an important corner.

From Project Syndicate:

For the past six years, US President Barack Obama's administration has, more often than not, sided with the interests of big banks on financial-sector policy. But this week, announcing a new proposal to prevent conflicts of interest in financial advising, Obama seemed to turn an important corner.

  From the outset of his first presidential term, Obama maintained the approach taken by George W. Bush's administration. Large financial firms benefited from the provision of massive government support in early 2009, and their executives and shareholders received generous terms. Citigroup, in particular, benefited from this approach, which allowed it to carry on with substantially the same business model and management team. And the Dodd-Frank financial-reform legislation of 2010 could have done much more to curtail large banks' power and limit the damage they can cause.

 

  Most recently, in December 2014, the administration abandoned an important part of the Dodd-Frank reforms – a move that directly benefited Citigroup by allowing its management team to take on more risk (of the kind that almost broke the financial system in 2007-08). Among financial-industry lobbyists and House Republicans, the knives are out to roll back more of the constraints imposed on Citigroup and other big banks.

  But now, in an abrupt and commendable turnabout, the Obama administration put the issue of conflicts of interest in the financial sector firmly on the table. The specific context involves the investment advice given to people saving for retirement.

  The decisions these savers must make are complex and can have profound consequences. Getting it right is difficult even under the best of circumstances. What will interest rates be? How long will you and your spouse live? What will your commitments to your children be, and for how long?

  But perhaps the most important question is whether you can trust your financial adviser. Some financial advisers in the United States are paid not on the basis of how their clients do, but according to what financial products they persuade them to buy. Dennis Kelleher of Better Markets, a pro-reform group, recently summed up the current situation well: “[A]dvisers can recommend investments that generate lucrative commissions for them, even though their clients get stuck with high fees, subpar performance, and unacceptably risky products."

 Kelleher has been an effective critic of the administration in recent years, pushing long and hard to address all potential conflicts of interest in finance. And now his analysis and recommendations are being echoed in a new report issued by the Council of Economic Advisers. “Such fee structures," the CEA warns, “generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the adviser's bottom line."

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