The U.S. Congress, acting to prevent future financial crises like the one that spread around the world in 2008, has moved to overhaul the regulation of U.S. banks and financial companies. The action fulfills a pledge that President Barack Obama made to world leaders last year that our country would take the lead in restoring stability to world markets badly rattled by the excesses of some leading U.S. financial institutions.
The new law gives the U.S. Federal Reserve Board and other government regulators more oversight of the largest, most interconnected financial companies and expanded powers to step in when they detect risky behavior that threatens the stability of the U.S. financial system. As in other nations, the U.S. regulatory system failed to keep up with fast changing and complex developments in banking and investment. The new rules will now cover financial products such as derivatives, financial contracts whose value is linked to changes in prices of other assests to which they are linked, such as stocks, bonds or a currency like the euro or yen. The largely unregulated trading in these complex instruments greatly contributed to the crisis. A new government agency will be set up to give U.S. consumers greater protections in their financial dealings.
Debate over the law lasted months and critics remain even after passage. Strong action was vital, however, since the economic downturn that followed the financial meltdown was the most serious since the 1930s. It began with the financial crisis, as bad loans and risky, unregulated investments brought banks to their knees and dried up credit. This deprived businesses of the money needed to fund their operations and plans for expansion. Companies cut jobs, people curbed their spending and the ensuing drop in demand resulted in more job losses. International trade also fell, which especially hurt commodity-producing developing nations in places such as Africa and Latin America.
As the crisis knew no borders, the effects of the new U.S. financial reforms will extend beyond the U.S. into the world's markets. Other nations are working on similar measures, and the U.S. will work with them to raise the standards of financial protection, a key element for sustained growth and economic recovery.