President Obama today unveiled his proposals to "fix" the financial industry. While I agree a few changes are appropriate (and I suggested some changes last September) it would seem that Obama's proposals are mostly cosmetic, and in some cases dangerous.

The plan would give new powers to the Federal Reserve to oversee the entire financial system and would also create a new consumer protection agency to guard against the types of abuses that played a big role in the current crisis.

There was a time when I thought the Federal Reserve was, at worst, a group of well-meaning people that just had a history of implementing bad policy to the detriment of the economy. But last week it was revealed that the Federal Reserve was bullying and strong-arming banks into making decisions they might not have otherwise made.

I still give the Federal Reserve the benefit of the doubt--despite a history of policy that has actually been counter-productive, I think the Federal Reserve has the interest of the economy at heart. But I cannot forgive or ignore the bullying that apparently goes on behind closed doors. The Federal Reserve already has an insane amount of non-transparent power; in light of the apparent bullying I cannot imagine that giving the Federal Reserve more power is a good idea.

Additional protections for investors, including greater disclosure by hedge funds; regulation of credit default swaps and over-the-counter derivatives that previously operated outside of government oversight; and new conditions on brokers and originators of asset-backed securities.

As I wrote last September, I think it'd be a good idea to make sure that credit default swaps only be issued to investors that hold the bond which the CDS insures--that would avoid speculation and gambling. But that doesn't mean we need a ton of regulations.

The creation of a new consumer protection agency seems rather unnecessary.

Sen. Chuck Schumer, D-N.Y., called the new consumer products agency "the cornerstone of regulatory reform." The Fed and other banking regulators, he said, were too focused on the "safety and soundness" of the institutions they oversee, and "did not do a very good job of protecting consumers."

The above quote is painfully humorous--it implies the government ("the Fed and other banking regulators") was so busy focusing on the safety and soundness of institutions that it didn't do a good job at protecting consumers. Well, it didn't do a good job focusing on the safety and soundness of the institutions either!

There is very little government is actually good at. We don't need more agencies and we don't need a whole lot of new regulations. We need common sense laws that, when violated, can be prosecuted. That doesn't require a ton of new bureaucracy and stifling regulations. The fact that that's what's being proposed suggests to me that this is mostly a cosmetic effort for "show" rather than a serious attempt to fix the underlying causes of the crisis. This, to me, is like the post-9/11 changes to airport security. Lots of noise and theater but not much that really makes us safer.

In short, it would seem that I was right in September when I predicted:

I'm sure there will be changes in regulations--some of the changes will probably be necessary while others will be "tacked on" as special interests use this crisis as an opportunity to get their ideas into regulations....

In conclusion, it seems to me that deregulation is not what caused this crisis. Nor is it necessary to set up entirely new governmental agencies with massive and invasive power in the markets. We simply need to respect traditional, conservative investing techniques.

We don't need a lot of new regulations and a new agency. In fact, it seems that a lot of the issues can be resolved with legislation like the legislation that was recently passed regarding credit cards. In the past we had the Truth in Lending Act which required credit terms to be clearly provided in a standard format. And Congress has taken some action to reign in what seemed to be some abuses by credit card companies. None of that required a new agency and we don't need a new agency today.

Creating more agencies in government will not solve problems.

Which raises the question: If we're interested in solving problems and avoiding future problems, does Obama's proposal repeal the Community Reinvestment Act and/or limit subprime lending? Does Obama's proposal make it illegal to loan money to uncreditworthy borrowers or to borrowers that can't reasonably be expected to repay the loan?

It appears that Obama will push for more regulation of derivatives and credit default swaps (and I agree with adding a single regulation regarding credit default swaps--that someone acquiring CDS "insurance" actually be a holder of the bond the CDS insures). But that's only half the problem. The other half of the problem is loaning money to people that shouldn't be loaned money. And that can only be entirely solved if the Community Reinvestment Act is repealed--or at least significantly modified.

Does Obama's proposal do that? If not, it's ignoring at least half of the problem even as it increases the size of government.