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A CASE AGAINST FINANCIAL REFORM

Why Washington's attempt to reform the financial industry will do more harm than good.
-- 5/29/2010

Two bills have passed Congress that promise to overhaul the American financial industry. The Senate recently passed S. 3217, the companion bill to House bill H.R. 4173, which passed late last year. These two bills must now be reconciled in committee and put to a final vote in each house to pass. Democratic leaders are confident the bill will become law by the Fourth of July.

Under this proposed legislation, the federal government will supposedly impose more regulations on financial institutions and derivatives markets in an effort to protect consumers and avoid bailing out companies that are just “too big to fail.” However this bill will not only provide more of the same, but it could be very damaging to the economy.

Consider the following clauses of this proposed law:

-->  The Treasury Department could seize control of any company if it is on the brink of bankruptcy and has been deemed "too big to fail." This enables the government to take over any private business and replace its leaders on the subjective judgment of political bureaucrats who have not even been elected by the people. What would stop these political appointees from seizing control of firms that have contributed to their opponents in past elections? Will it make firms more reluctant to contribute to administration opponents? And will firms who contribute to the administration get preferential treatment? This smacks of political cronyism, which opens the doors to more of the corruption that helped cause the economic downturn in the first place.

-->  No penalties or additional restraints are placed on the two largest mortgage companies, Fannie Mae and Freddie Mac, even though they were primarily responsible for the housing bubble that began the economic crisis. These firms recorded huge losses in the first quarter of this year, but under a law passed in December, they will enjoy unlimited taxpayer-funded bailouts. This only encourages them to build yet another housing bubble that will one day burst, beginning the disastrous economic cycle all over again.

-->  A "rescue fund" would be established to bailout big banks and other politically-connected businesses. (The House version of the bill sets the fund at $50 billion, while the Senate version has no limit.) What incentive will these firms have to be financially responsible when they know they will have a taxpayer-funded safety net to cover their bad business decisions? This not only rewards failure, but it paves the way for even more corruption through campaign donations, lobbying and bribes.

-->  The Federal Reserve will be empowered to oversee any institution deemed risky to the financial system, as well as to set standards on compensation for executives of unsound firms. Considering that the Fed was partly responsible for the economic crisis through onerous regulation of currency and interest rates, this is tantamount to the wolf guarding the henhouse.

-->  One of the primary purposes of this legislation was to place more regulation on derivatives markets. However the bill’s sponsor, Connecticut Senator Chris Dodd, caved to Wall Street lobbyists and removed that portion from the Senate version. So this is a derivates market-regulation bill that does not even regulate the derivatives markets.

-->  A new consumer protection agency will be created to review all loans extended by all businesses in the U.S. This will be a bureaucratic nightmare, as the flood of paperwork will bottleneck the loan process. This bottleneck will stifle consumer spending which in turn will hurt businesses, kill jobs, and slowly strangle the economy until it crumbles. 

While this law is supposedly intended to stop abuses by big firms such as Goldman Sachs, it will actually enable them. When viewed from this perspective, there is little wonder why Goldman Sachs was the top contributor to the campaigns of President Obama, Senator Dodd and many others who support this bill. Perhaps the SEC investigation of Goldman Sachs for fraud is just a red herring to divert public attention while this bill gets passed. 

The ultimate losers under this new legislation are (once again) the taxpayers and small business owners:

-->  Taxpayers will continue to be responsible for funding bailouts of privileged institutions.

-->  Small businesses cannot compete with larger ones when the larger ones have the luxury of getting bailouts. The bigger firms could use the bailouts as leverage to drive smaller competitors out of business. Less competition means less choice; less choice means less consumer spending; less spending means less production; and less production means less jobs. So this bill not only hurts taxpayers and small businesses, but it is a potential job-killer as well.

This is nothing more than government siding with business against the people, which is what got us into this mess in the first place.


To read the text of these bills, click here for H.R. 4173 or click here for S. 3217.