The financial sector will make up a smaller part of the US economy in the future as new regulations clamp down on "massive risk-taking," President Barack Obama said in an interview published on late Saturday.
Obama, whose young administration has spearheaded a raft of reforms in the banking sector as part of efforts to tackle the financial crisis, said the industry's role in the United States would look different at the end of the current recession.
"What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade," he said told the New York Times Magazine.
"Part of that has to do with the effects of regulation that will inhibit some of the massive leveraging and the massive risk-taking that had become so common."
Obama said some of the job-seekers who may normally have gone to the financial sector would shift to other areas of the economy, such as engineering.
"Wall Street will remain a big, important part of our economy, just as it was in the '70s and the '80s. It just won't be half of our economy," he said. "We don't want every single college grad with mathematical aptitude to become a derivatives trader."
The Obama administration in March proposed sweeping reforms to curb risk-taking on Wall Street and close regulatory gaps to prevent the kind of excesses that led to the worst financial crisis since the 1930s Great Depression. The president said in the interview that better regulation would help restore confidence in the US financial system.
"A more vigorous regulatory regime, I think, will help restore confidence, and you're still going to see a lot of global capital wanting to park itself inn the United States," he said Obama expressed optimism that the market for securitized products would pick up, though he said that could take time.
The Federal Reserve, with taxpayer capital from the US Treasury, is supporting consumer and real estate lending markets through a loan facility that could reach $1 trillion. Holders of existing asset-backed and commercial mortgage-backed securities can get loans from the Fed by putting up their securities as collateral. The facility aims to unclog frozen credit markets and jumpstart securitization.
"We're going to have to determine whether or not as a consequence of some of the steps that the Fed has been taking, the Treasury has been taking, that we see the market for securitized products restored," Obama said. "I'm optimistic that ultimately we're going to be able to get that part of the financial sector going again, but it could take some time to regain confidence and trust."
Part of Obama's regulatory reforms include the creation of a new "systemic risk regulator" with broad powers to seize large non-bank financial firms, such as insurers, hedge funds or private equity companies, if they are deemed to threaten the stability of the financial system. Large, "systemically important" firms would be required to hold bigger capital cushions. Obama also said financial rules should be crafted according to what an institution actually does to avoid a regulatory gap in areas such as commercial and investment banking.
"Other countries that have not seen some of the problems in their financial markets that we have nevertheless don't separate between investment banks and commercial banks," he said, citing Canada as one example in that area.
"The experience in a country like Canada would indicate that good, strong regulation that focuses less on the legal form of the institution and more on the functions that they're carrying out is probably the right approach to take."
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