A Critique of the Banking Reform Bill of 2009
The recent passage of a financial reform bill by the House of Representatives provides President Obama with a symbolic victory, but how will the elements of this potential new law affect the economic well-being of our country? Let's take a look at the provisions of the bill, along with comments made by its proponents, and ponder what value the legislation would provide to American society.
The bill would create the Consumer Financial Protection Agency to regulate
products such as credit cards and mortgages.
The Securities and Exchange Commission has had... for several decades... all
the power and information it needs to properly regulate the investment industry,
yet the past decade has seen a proliferation of manipulated earnings reports
and surprise financial failures. High-profile hedge fund meltdowns over the
last year demonstrate what can happen when a government regulatory agency is
incompetent or corrupt. Why does anyone expect a different result from more
government? An agency such as proposed in this bill would do no more than increase
expense to tens of millions of responsible credit card users because the costs
of complying with regulatory oversight will be passed along in the form of
higher interest rates and fees.
Financial institutions will be required to deposit up to $150 billion into
an emergency fund to be accessed when failed companies need to be taken over
and broken up.
This feel-good provision is nothing more than an attempt to show the public
that government is reacting to their woes, but does anyone seriously believe
$150 billion will be enough to tackle the next crisis? Like most reactionary
policies, the long-term effect will not be the intended one. The most obvious
implication is that the Federal government is positioning itself for more interference
of market forces, thereby providing a false sense of security not unlike the
repeated bailouts carried out by the Federal Reserve. Also, sequestering such
a sum of money will do little more than put a damper on economic activity.
"The bailouts of AIG and Bear Stearns would be not possible... made illegal...
under this bill. If a company fails, it'll be put to death." -Barney Frank
We already have a mechanism for putting failed companies to death. It's called
the free market economy. In fact, the bailouts exercised during the crisis were
already illegal. Why do we need a law to give us what we already had?
The bill would give Congress the authority to order the GAO to audit Federal
Reserve Activities.
Congress would have the authority (but not the obligation?) to order an audit
of the Federal Reserve. When would such audits be ordered? By what committee?
And even if an audit were ordered, it would be performed by an agency that
is beholden to a President's political agenda over a central bank whose leaders
pull the President's strings. This provision is a weak attempt to reign in
the organization responsible for exacerbating the country's economic problems
from one crisis to another, yet it is not even clear the authors comprehend
that the Fed is the culprit. If the people of Congress really understood the
roots of our problems, they would abolish the FOMC, limit money creation to
a factor of economic and population growth, and relegate the Federal Reserve
to simple oversight functions.
A new council would be created to hunt for trouble at large financial firms
and give the Federal Reserve authority to enforce tougher rules.
Mechanisms were already in place for such oversight by both the Federal Reserve
and the SEC. Both organizations proved to be incompetent at recognizing trouble.
How will this new council be different? Does anyone not see the conflict of
interest in giving the Federal Reserve punitive authority over the institutions
that own the Federal Reserve?
The Federal Reserve will have to approve all acquisitions of non-financial
companies made by a bank when the acquired assets exceed $25 billion.
Our nation would be stronger if we simply reinstate the Glass-Steagal Act and
perhaps even strengthen it such that a bank can be a bank and nothing more.
Banks should not be direct risk takers. They should simply lend to risk takers
in a way that makes a profit while protecting deposited money. Boring. Simple.
Safe.
"A major failure of the previous administration was regulatory neglect." -Democrat
Majority Leader, Steny Hoyer
This statement is undeniably true. So why doesn't Congress address the issue
of preventing regulatory neglect before it heaps more regulation?
The Office of Thrift Supervision would be abolished.
Great! Now let's get on with abolishing a few more useless agencies.
Hedge funds would have to register with the Securities and Exchange Commission.
It is not clear how the SEC will evaluate hedge fund risk nor whether the regulators
would really know what to inspect. After all, the agency was handed warnings
for several years ahead of Bernie Madoff's demise and failed to act, and
some of the financial products are so complicated, that the few who understand
them serve those who pay, not those who regulate. Furthermore, if hedge funds
of all sizes are required to register, a huge barrier to entry would be raised
for small operators in the form of regulatory expenses. Such costs would
result in fewer hedge funds, fewer choices for investors, and a larger concentration
of power for the big boys... exactly the opposite medicine from what the
industry presently needs.
States will be given $1 billion of bailout money to buy abandoned or foreclosed
homes and prepare them to become rental properties.
If there were a viable market for this activity, private entrepreneurs would
already be doing it. It there is not a viable market, then Congress is simply
squandering more public funds. Therefore the provision is either unnecessary
or wasteful. In any case, one billion dollars is a diminutive sum and will
make no impact on the national economy. Most likely, these dollars are earmarked
for a few politically-connected parties.
Regulators will have the power to break up companies that are perceived to
threaten the economy, even if the company is healthy at the time.
It seems farcical to expect regulators to suddenly gain the foresight they
lacked before the crisis. Even if people within a regulatory agency were to
accurately recognize such a problem, would they truly possess the political
will to exercise this power? Congress simply needs to admit its mistake and
un-repeal the Glass-Steagal Act. Prevention is far more potent than reaction.
Furthermore, this provision gives regulators... and thereby Congress or the
President... the ability to manipulate financial companies under duress of
break-up. It would certainly be disingenuous to believe that such pressure
would not occur for political rather than protective ends. Indeed, this provision
centralizes power over the economy and moves the United States a big step toward
a system it fought for decades: communism.
A new Financial Services Oversight Council would be given the authority
to restrict or prohibit proprietary trading at securities firms.
One of the great malfeasances of the Bush administration was the loosening
of leverage restrictions for securities firms from 12-to-1 to 30-to-1. Even
worse, this exemption was given to only six firms... none other than those
with the firing power to threaten our economic well-being. Once again, an admission
by Congress of a mistake and a return to prudent regulation is all that is
needed.
This legislation is a manifestation of linear thinking and a complete lack of understanding of economics and human action. It reflects our President's continued attempts to be popular rather than constructive, and further centralizes power after a decade in which too much centralization lead to disaster. Expanding government will do nothing to prevent another crisis, but rather guarantees that more of our nation's wealth will be burned in bureacratic fire.
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