President Obama has secured an apparent victory, as a House-Senate panel hammered out an agreement, in the early hours this morning, that will provide for a sweeping overhaul of the rules overseeing Wall Street. The bill is exhaustive, somewhat restrictive on the banks, the toughest financial overhaul since the Great Depression, wide reaching in scope--as it would affect individual homeowners and global finance ministers alike--and controversial in nature. The bill must also be approved by the full House and Senate before it is presented to the President for his signature--perhaps on July 4th.
Essentially, the bill's victorious proponents had hoped it would secure panel approval in time for Mr. Obama to have it in hand when he meets with leaders of the Group of 20 nations this weekend in Toronto. They achieved that goal, handing the President a clear political victory. Overall, the bill contained some tightened restrictions on the nation's banks, but fell short of the more severe constraints sought by some proponents. The vote was along party lines, with the Democrats favoring it and the Republicans in opposition.
On balance, the new mammoth legislation, if approved by the full House and Senate, would require the banks to install new capital and leverage limits, empower the government to conduct ongoing audits of the Federal Reserve's lending programs, and force the nation's bigger banks to divest their major interests in hedge funds. The bill is clearly punitive in nature, and only time will tell if it is effective.
The timing is interesting and, given the recently stumbling economy at home and troubled situation abroad, may add restrictions that might prove counterproductive--at least in the short term. That is because the panel's passage of this proposed legislation comes on the morning that the government released data showing a downwardly revised estimate of the first-quarter gross domestic product. Initially, opening-period GDP growth had been estimated at 3.2%; that level of improvement was then revised down to 3.0% last month. Now, the final revision has cut that estimate to an even more pedestrian 2.7%. That is not a hopeful development going forward. What's more, current-quarter growth, at which we will get our first read next month, now looks as though it will be no more than 3.0%-3.5%. That is well below expectations for the period that had prevailed earlier this year. Restraining growth continue to be high joblessness, weak construction activity, and lackluster consumer spending.
Moreover, we are increasingly concerned about the second half, as the aforementioned problems look as though they will continue. At the same time, the fiscal stimulus programs enacted last year are starting to wind down and will recede further as the year concludes. That, too, will hamper growth, which may not exceed 2% by much in the back half of this year. Could this legislation, a political victory of note, prove to be a Pyrrhic victory? It is too soon to tell, but the signs are not hopeful.