President Obama's proposed overhaul of financial-industry regulation blends ambitious scope with some political realism, but that doesn't necessarily mean it will be successful.
The goal is a daunting one, after all: to make the financial system much less vulnerable to the kind of crisis seen last year.
Mr. Obama and his economic team are trying to strike a careful balance – imposing new oversight where systems failed, while not attempting a politically divisive remake of the whole system from scratch.
Some financial experts worry the proposals fall short. The risk, they say, is that regulatory flaws will be patched over while leaving the system as vulnerable as ever to a new crisis.
Even if the plan is well designed, key hurdles remain. Major elements must be cleared by Congress, something Obama hopes to achieve this year. And any regulation is only as good as the people who implement it. The regulatory climate can be as prone to cycles as the financial markets themselves.
"They have tried to achieve very ambitious goals within the framework of what is realistic," says Doug Rediker, a former investment banker now at the New America Foundation in Washington. The economic crisis creates a window in which Congress may be able to pass sweeping changes, he says, yet "there's a real risk that well-intentioned proposals get watered down."
• Is the Federal Reserve, with a new advisory panel at its side, the right body to police overall risks to the system?
• Are derivatives – the complex investment products that helped spawn the mortgage meltdown – getting enough new supervision?
• Does the president's plan do enough to cut through a clutter of competing financial regulators, from state insurance commissioners to a commodity commission?
The mood in Washington has shifted away from the notion that private markets can regulate themselves. Then again, it's not that regulation can substitute for the discipline of the private marketplace. But the recent crisis has served as a reminder that financial transactions can be prone to manipulation and groupthink.
Obama hopes to deploy some new tools to reinforce private-sector incentives. The issuers of derivatives will be required to hold a 5 percent stake in their own products, for example. But the Obama team also sees a role for tighter regulation, such as regarding the capital that banks must hold in reserve.
Sharp debate will center around the role of Federal Reserve. In many other nations, the central bank sets monetary policy but is not also charged with regulating banks. Obama would make the Fed a supercop for financial stability that would look at large firms whose activities in the past sprawled beyond the oversight of any single regulator.
A new oversight council, chaired by the Treasury secretary, would work alongside the Fed to identify emerging risks.
Some financial experts say the Fed fell down on its job as a regulator heading into the recent crisis and shouldn't be handed more responsibility. Some say it will also be harder for the Fed to retain its independence from politics if it has what Obama calls "new authority and accountability" as a financial regulator.