I'm listening to the resigning Senator from Connecticut, Chris Dodd, misrepresent his flawed financial regulatory 'change' bill. It's unworthy of the adjective "reform."
Evidently, Dodd is now brain-damaged, as his remarks on CNBC reflect an alternative-universe sort of description of what happened to the financial sector in this last decade.
Among the many lies Dodd is telling as I write this are:
-Unlike health care reform, which most Americans didn't understand, they understand the ins and outs of financial reform.
-Fannie and Freddie need reform, but aren't in the first rank of problems.
-His bill brings 'shadow markets' into the a sort of regulatory light.
-Any opposition to his bill is political, and consists of niggling details meant to totally foil any financial regulatory reform.
Honestly, Dodd is so grafted-up and confused that he can't even come close to knowing reality when he sees it anymore.
Here's the truth about his deeply-flawed bill to change- I won't dignify it with the word "reform" - the financial sector of the US economy.
First, both in Dodd's bill, and his party's president address yesterday at Cooper Union, much is made of various new rules for the sector.
Derivatives are to be cleared through an exchange- subject to the CFTC's chairman's choice.
Banks will be judged for solvency by a federal regulator.
Regulatory officials, not Congress, via legislation that remains clear and unchanged, will decide what is 'proprietary trading.'
Between the president's failure to acknowledge Congress' and the Fed's roles in starting the financial mess, via too-long and too-low interest rates, accommodative monetary policy for a decade, and converting Fannie and Freddie into low-cost public housing finance agencies, and Dodd's bill's many reliances on the discretion of regulatory agencies, the Democratic regime is attempting to inject more, not less uncertainty into being a financial service firm.
This morning's Wall Street Journal lead staff editorial notes how much of the currently-proposed legislation defers important regulatory definitions and rules to an ever-shifting group of federal bureaucrats. A group that will change with each new administration.
Rather than a fairly simply, clear set of rules, a la Glass-Steagall, the muddled Dodd bill, which the president demands be passed without significant change, actually allows markets to experience regulatory changes from strict to lax. Wait long enough, and perhaps a permissive administration will allow what was once forbidden.
How does this help provide lasting clarity and certainty to the US financial markets and sector?
The bulk of the financial sector's activities are, contrary to the profoundly misinformed Senator Dodd's belief, not only not understood by most voters, but not even known. Few citizens understand the arcane and complex worlds of structured finance underwriting or derivatives and swaps trading and accounting.
Further, as the Journal's editorial notes, Dodd's bill doesn't bring much of anything 'out of the shadows.' Instead, it will guarantee even more expensive, perpetual lobbying by financial firms to influence the changing corps of bureaucrats who oversee the industry.
Laws which are clear and unchanging don't promote constant attempts to interpret them differently. Dodd's bill, which puts so much regulatory action at the discretion of appointed bureaucrats, without clear language or metrics, invite constant attempts to curry favor and buy favorable rulings at federal agencies.
This is how big government gets bigger. Write murky law and leave it to unnamed, unelected agency officials to make key decisions, thus making business dependent upon the political class for their daily survival.
The president's glaring omission of mention of Freddie or Fannie in his address yesterday confirms his inability to actually understand how the seeds of financial trouble were planted. Even though he voted to stop legislation that might have reined in these two GSEs, which were the true origin of the financial mess. A mess which gained momentum when private mortgage finance operations got rolling to feed the demand by Fannie and Freddie for low-quality mortgages via "liar loans" and subprime paper.
Holman Jenkins, Jr. wrote, in Wednesday's Wall Street Journal,
"It's true that such deals gave housing bulls an additional way to lose money. But to blame shorts for making the bubble worse comes close to saying salvation for the markets is to exclude participants who are bearish.
This is especially peculiar since the bubble's true Rosetta Stone is being ignored, though it has been hammered away at by a member of Washington's own Financial Crisis Inquiry Commission, in the person of Peter Wallison.
Mr. Wallison has publicized new data showing that Fannie, Freddie and FHA financed a lot more subprime and Alt-A loans than anyone realized (because they were mislabeled). It turns out almost half of the $10.6 trillion in U.S. mortgages outstanding in 2008 were low quality. This is the data that might have changed investors' minds—suggesting that the American public's capacity to shoulder housing debt was far more saturated than anybody knew."
I was struck by yesterday's Yahoo Finance page headline declaring that Obama was going to New York, the 'source of the financial collapse,' or words to that effect.
How misleading! Washington, not New York, originated our recent financial meltdown. Then mortgage, commercial and investment banks obligingly fed Fannie, Freddie and FHA with the low-quality loans they demanded, at Congress' behest, then also obligingly repackaged the GSE paper as CDOs to sell globally. Alan Greenspan's and Ben Bernanke's ultra-low Fed interest rates helped this party continue by inflation housing values and supplying plenty of low-cost funding.
How you come to blame commercial and investment banks for this mess is difficult to understand.
Thus, our president and his party's lead Congressional legislator on this topic, Chris Dodd, both have earned zero credibility by ignoring the truth, and substituting their false account of the debacle.
From these false explanations of the financial crisis' origins, you cannot expect effective financial regulatory 'reform' to come.
Add the Democrats' demonization of any Republican who dares suggest that Dodd's bill is not, a la Candide, 'the best of all possible financial reform legislations,' and you have a new disaster in the making.
Finally, politicians of all stripes and both parties are running about blathering about how 'getting financial reform right will help the economy, but getting it wrong will be a disaster.' Even Karl Rove wrote that in his Journal column yesterday.
I respectfully disagree. Getting it wrong, yes, will invite new disasters. But getting it right just allows the economy to function smoothly. It doesn't magically create wealth or economic growth.
There are a few glaring, existing problems that need to be addressed immediately, and, like health care, could be done in a one-page bill. As my friend and experienced senior financial executive, B, foresaw over a decade ago, something approximating Glass-Steagall or the Volcker Rule needs to be enacted as clear, simple and unyielding legislation right now.
Simply put, any financial institutions that enjoys the protection of federal, taxpayer-provided insurance cannot be allowed to engage in risk-enhancing activities including: proprietary trading, investing in assets other than Treasuries, or underwriting of securities. They also can't invest in companies or businesses, either arms-length or as subsidiaries, which use leverage and/or do any of these activities.
Other than that, virtually every other aspect of Dodd's bill needs to be reconsidered, rewritten and carefully debated, with testimony in open hearings by players in the financial sector, before anything is passed.
As with health care, the president, in his Cooper Union address, is again wrong to demand immediate passage of proposed legislation just to 'get something done,' while characterizing anyone who dares disagree with this bum's rush approach as anti-regulation, anti-public good, and merely greedy and self-serving.
As I noted in this post yesterday,
"I wasn't about to waste my time listening to an uninformed, naive politician natter on about financial regulation. Experience has shown that, from this president, all you'll hear about financial sector regulation is some ill-informed notions of consumer protection, the vilification of private institutions, and a complete ignorance of Congress' own culpability in the recent financial mess.
I'm sure the evening cable news programs and tomorrow's Journal will provide me with all the details I need to know about this morning's speech. How the president railed against and demonized the legitimate expression of opinion by publicly-held banks, through lobbyists, concerning regulation affecting the sector."
It develops that I was correct. Our uninformed president provided nothing remarkable, nor new, in his remarks. They were the usual bashing of current businesses and the petulant demand to pass his party's legislation, unchanged, or risk being publicly targeted as anti-social.
If this is good governance, we're in big trouble. And we are.
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