One of the most attractive features of Harper's Magazine is the Harper's Index, which compiles statistics on just about anything.

 The July issue states that 93 per cent of Democrats approve of Obama's job performance and so do 30 per cent of Republicans. It also establishes that 20 per cent of Americans, in April, believe that "socialism is better than capitalism" and 64 per cent of rich Americans say that they have lost faith in the integrity of financial service institutions.

 The Economist of May 30 provides a slightly different perspective on what it claims is a "failure of finance, not capitalism." It refers to an un-referenced poll released May 21 that found 76 per cent of Americans believe their country's strength is based on the success of its businesses and 90 per cent admire people who "get rich by working hard." Can trading derivatives be considered hard work?

 If the Harper statistics are to be trusted, then to restore the confidence that is apparently lacking, and prevent future collapses, President Obama just, on July 17, presented his restructuring plan for the banks and the rest of the financial service industry.

 In the president's words, "We did not choose how this crisis began. But we do have a choice in the legacy this crisis leaves behind. So today, 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."

 The new regulation will monitor system-wide risk and avoid the mistakes of the past, which the president described as "seeing the trees, not the forest." This inability to see the big picture created the vulnerability of the system because "the failure of one large firm threatened the viability of many others; the effect multiplied."

 By concentrating entirely on the flaws of each institution, the regulators could not see systematic or structural failures. The new proposal attempts to redesign regulation more appropriately, effectively and with greater powers.

 In addition, a new watchdog agency will protect consumers from deceptive or dangerous mortgages, credit cards and other financial products. According to the president, the crisis was not entirely the fault of the financial firms; it was partly caused by the decisions of ordinary people to increase their financial obligations. This culpability of the ordinary person merits significant examination: was it irresponsibility? Ignorance? Greed? Vulnerability to official endorsements? So the USA is going to have new mortgage rules, and new limitations on the free markets.

 In his speech, one extremely interesting observation was this: "We are called upon to recognize that the free market is the most powerful generative force for our prosperity - but it is not a free licence to ignore the consequences of our actions."

 Of course, the actual implementation of new regulations will necessitate legislation by Congress and some commentators expect this could take some time. There will be opposition to some of the proposed reforms perceived to be too harsh, and opposition to the laxity of others.

 The idea of a financial consumer protection agency is already causing controversy since it will be an entirely new regulatory body with the possible power to curb innovation and growth in the industry. On the other hand, it might also have the (Big Brother?) power to curb the risks associated with "consumer irresponsibility or ignorance."

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 The Obama proposal should not put his high approval rating at risk. He continues to be perceived as the president who is trying to fix the economy and if there is visible improvement, more government will not be considered such a bad thing.

 Daphna Levit was an international equity analyst at Merrill Lynch in Tokyo, vice-president at Morgan Stanley in London and senior vice-president at Barings Securities in New York. When she retired from the active markets, she went on to teach finance and economics to MBA students. She now lives near Lunenburg.

posted on 06/30/09