The era of new regulation
Even as Uncle Sam casts a more watchful eye, you'll need to be a more diligent consumer.
(Money Magazine) -- Old: If there was a mantra that defined the past era, it was Ronald Reagan's famous words: "Government is not the solution to our problem, government is the problem." Investors and policymakers came to believe that "the markets, left to themselves, achieve the most efficient outcomes," says New York University finance professor Viral Acharya.
So over nearly 30 years, Washington loosened a host of regulations. Interest-rate caps on credit cards were removed; restrictions on mortgage lending were eliminated; and banks, brokerages and insurers were allowed to merge. The trend only accelerated in the last decade as U.S. banks turned into global behemoths.
New: Today, of course, this deregulatory push is being reversed as many have blamed the global financial meltdown on a lack of government oversight. What's more, with most countries now in recession, nations around the world have had to become big players in the financial markets - a position they're likely to maintain for some time.
There are now proposals in Europe, for example, to create continent-wide regulatory bodies that will supervise financial institutions and the systemic risk their activities can pose.
Here at home, the regulatory screws are also tightening. The President recently signed legislation that limits card issuers' ability to raise interest rates. Meanwhile, the Federal Reserve, the U.S. Treasury Department, and Congress are all looking into ways to deal with financial institutions that are deemed too big to fail.
As Uncle Sam tries to re-regulate financial services, the onus will be on you to be an even smarter consumer. Why? Government reforms are almost certain to have two big, if unintended, consequences: In the short term - between the time new consumer protections are proposed and when they're enacted - financial institutions will look for ways to protect their profits, perhaps by imposing new or higher fees. So over the next year or so, you'll have to look at your account statements much more closely to make sure you're not inadvertently footing the bill for reform. If you're getting socked with rate hikes or escalating charges, consider taking your business elsewhere. Remember, banks and brokerages desperately want your capital.
In the long run, recognize that protection comes at a price. For example, Washington is now taking a closer look at money-market funds, which took a hit last year when some investors lost money in Reserve Primary, which was supposed to be a safe cash account.
Proposals are now in the works to provide these funds with federal guarantees, as well as to tighten rules for what they can invest in. As a result, money fund yields could take a hit, potentially making competing products like online savings accounts more appealing. The feds won't tell you that. It will be up to you (and Money Magazine editors) to stay on top of the changes.
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