Financial Regulation “Reform”

Allow me to lead into my thoughts on yesterday’s signing of the Frank-Dodd Wall Street Reform and Consumer Protection Act with the following thought: I really, REALLY don’t like Barney Frank.
 
First, he insists in 2003 that we “roll the dice a little bit more in this situation towards subsidized housing” (seemed to work out nicely, eh?). This, of course, was after he recieved tens of thousands in campaign contributions from Fannie Mae and had an eight-year affair with a Fannie executive while voting against transferring oversight of Fannie from Congress to the Treasury Department. Not like that’s a conflict of interest or anything. And now, after allowing his personal situation to persuade him to vote irresponsibly on subsidized housing to push forward his ludicrous, militantly egalitarian agenda, he’s portrayed by his party as some savior by becoming the namesake for this lousy piece of legislation.
 
Thanks, Barney.
 
In fairness, the bill isn’t ALL bad. I’m glad to see it establish somewhat of a rudimentary criteria for a company to receive a government bailout — even if there are still some gray areas. The bill requires that only companies with sufficient collateral can receive federal bailout funding for the sake of market liquidity; “failing” companies cannot receive that same aid. What exactly constitutes “failing,” however, I’m not entirely sure.
 
Here’s the short list of my concerns with the bill (for brevity’s sake, I’m only highlighting a few things that sparked my interest and I’m leaving out a considerable amount):
 
First, it creates 12 new government agencies and bureaucratic offices, including the Office of Credit Ratings, the Financial Stability Oversight Council, the Office of Financial Research and a Vice Chairmanship for Supervision of the Federal Reserve. If history has taught us one thing, it’s that additional layers of bureaucracy rarely prove any more effective and only add a new, unnecessary layer of checks and balances to the government so that any sort of effective response to any problem becomes just that much more difficult. For instance, in five or ten years, the newly created Office of Credit Ratings might want to establish a federally mandated minimum credit score in order to receive a given mortgage. Now, it has to be approved by both houses of Congress and the President, but only after securing an endorsement from the Fed, the Treasury, the Office of Credit Ratings and presumably several of the other agencies created by the Frank-Dodd Act. It’s just going to complicate further, more necessary regulation in the future.
 
Secondly, if you weren’t aware, the bill gives the FDIC the authority to seize and dissolve or redistribute the holdings of a company that is deemed a threat to the American economy. That really scares me. First off, such a move would undoubtedly shake consumer confidence in a way that would painfully manifest itself on Wall Street (potentially as badly as the actual collapse of the company). It also provides a very dangerous precedent for excessive government interference in the private sector, something that I am adamantly opposed to on ideological grounds. And finally, it subjects a complex business framework to management marred by bureaucratic bias and an agenda that is focused on protecting the government, not the investors in the company and its bottom line.
 
The bill goes on to give the government the power to provide assistance to companies that are not considered “failing” — however, the assistance is to be paid for after the fact and there is no framework set up for such assistance to take place. In other words, the government has written out a big blank check to be given to whatever company is in financial need with no plan for how exactly to pay it back. In the end, guess who ends up footing the bill? Big companies and hedge funds, particularly those whose practices are deemed most risky. It’s the same old story of the government punishing financial and entrepreneurial success as a means to save itself from its own irresponsible spending. So much for protecting business innovation and hard work.
 
What we needed was a bill that monitors the creation and distribution of unexplored, risky securities. What we got was a Barney Frank-glorifying, government-protecting, Fannie and Freddie-ignoring, bureaucracy-expanding, private sector-undermining, behemoth of a bill. While it isn’t the end of the world, such a bill focused on response over prevention won’t do much to mitigate future economic crises. Hopefully, learning from our past will be enough to help us do just that. Hopefully.