The Big Question: Will financial reform work?

Michelle D. Bernard, president and CEO of the Independent Women’s Forum, said:

Will financial reform legislation, if signed into law, prevent economic meltdowns like the one the nation faced in 2008?

No. It wasn’t a lack of regulation, but a lack of responsibility and perverse incentives, that led to a world-wide financial meltdown.  The fundamental problem with this new financial regulation bill is that it continues to position government as a safety net for institutions deemed “too big to fail” and doesn’t address the fundamental problem of too much borrowing.  The moral hazard will encourage banks to take on big risks in hopes of big profits, knowing that they’ll be shielded from the full consequences if things go wrong.

Giving government broad discretion of how to handle failing institutions will also make the relationship between financial institutions and their regulators (and the politicians who empower them) even more open to corruption and collusion.  Many wondered why some banks were bailed out and others allowed to fail during the initial financial crisis.  We need regulations that will prevent arbitrary outcomes, since that “flexibility” ultimately can politicize the process.

The best way to prevent economic meltdown is to make financial institutions (including the likes of Fannie Mae and Freddie Mac) fully responsible for their decisions and to discourage too much lending.  Most importantly if banks take on big risks that turn out to be bad bets, big losses should be their fate.  In the case of bankruptcy, it would be far fairer to proceed with a normal legal bankruptcy proceeding than to use an inherently political process. 

New regulatory entities aren’t enough to prevent problems; we need to change incentives.

 

Lisa Rice,  Vice President of the National Fair Housing Alliance, said:      
That depends.  Bear in mind that the Federal Reserve attempted to establish regulations to curtail predatory lending practices back in the 1990s.  Unfortunately, the Fed gave too much deference to the lending industry, which argued that if the rules were too restrictive, credit would dry up and consumers would be hurt.  The Fed did not give, as we have all learned too late, enough deference to civil rights and consumer protection groups who argued that lax rules would do nothing to curtail abusive and unfair practices and lead to a proliferation of devastating home foreclosures.

If Congress follows the Fed’s example and enacts a law that is too lax and based on what the industry says is needed, then no; financial reform will not work.  But if Congress does its due diligence and pays close and critical attention to what first responders are saying – the civil rights and consumer protection groups that are actually doing the hard work of helping consumers out of predatory and abusive credit contracts, then yes, financial reform will work.

The financial reform bill eliminates the key flaw for consumers in the current system -that we have lots of banking regulators but none of them has the primary job of consumer protection.  The Consumer Financial Protection Bureau will be fundamentally different from the banking regulators, because its first constituency will be the public, not the banks.

Heather Booth, director of Americans for Financial Reform, said:

We have the first chance since the big Wall Street banks nearly crashed the economy and cost of 8 million jobs, to actually hold them accountable.  We can win strong consumer protection against abuses by mortgage lenders and credit card companies; rein in the risky casino of derivatives and make them transparent; set limits on the size and risks of banking institutions and win a say on pay for investors and pension holders.  But only if we organize to counter the money and lobbying of the big banks and the politicians who respond to them, trying to undermine reform.

Dean Baker, co-director of the Center for Economic and Policy Research, said:

Very few economists saw the $8 trillion housing bubble on the way up. Remarkably, even as its collapse has wrecked the economy, leaving more than 10 million homeowners underwater and giving us near double-digit unemployment, very few of these people still understand the housing bubble.

The bubble is the story of this crisis, the financial aspects are secondary. This is easy to see by the fact that even countries with well-regulated financial systems that did not experience crises still saw sharp rises in unemployment. Spain, which is often help up as a model of good regulation, had the sharpest rise in unemployment. Its unemployment rate is currently over 19 percent.

The reason was that Spain has such high unemployment is that it had a huge housing bubble that has now collapsed. It is not easy to quickly replace large amounts of lost demand. The U.S. is in the same position, unable to replace the $600 hundred billions dollars in annual construction spending that has evaporated due to the collapse of the bubbles in residential and non-residential real estate. In addition, we have lost close to $500 billion in annual consumption spending due to the loss of more than $6 trillion in housing bubble wealth.

If we are not even talking about the bubbles, then there is little reason to think that this reform will prevent the next one. Congress has also backed away from measures that would fundamentally change the financial industry either by breaking up the too big to fail banks or by downsizing the industry with a financial transactions tax.

The proposed reforms will improve regulation, most importantly by creating a consumer financial products protection agency (or bureau), but it will not prevent the next crisis.

Craig Newmark, founder of Craigslist.org, said:

New financial reform will help a lot, but the biggest step’s already been taken, among the rank and file of financial regulators.

Previously, they’d been told that their jobs don’t matter, that government’s the problem, don’t bother.

Now, the new guy tells ’em that they play a vital role in protecting Americans, get the job done.

That’s making a big difference throughout Washington, quietly, never really reported.

Frank Askin, professor of law at Rutgers University, said:

I am a lawyer, not an economist, so it is difficult for me to offer an informed opinion.  But independent, non-partisan economists whom I respect seem to think these are necessary reforms.  So I have to rely on their judgments.

Justin Raimondo, editorial director of Antiwar.com, said:

The financial “reform” bill drawn up by Senator Chris “Countrywide is on your side” Dodd is indeed a permanent  bailout bill, with plenty of loopholes big enough for banking giants like Goldman  Sachs to drive a tank full of credit default swaps through. And you can be sure that big donors to the Obama campaign — Goldman gave $900,000 to the president’s campaign organization — are not going to be hurt by this: 

indeed, barriers to market entry set up by the Dodd legislation will help Goldman keep out competitors and further cartelize the banking industry.Obama’s former legal counsel has just joined Goldman: Robert Rubin, Tim Geithner, and the whole gang are in bed with Goldman, in spite of the phony SEC “prosecution” — which only mentions a single Goldman  employee.

As a Goldman lobbyist recently put it to Politico: “”We’re not againstregulation. We’re for regulation. We partner with regulators.”

You bet they do.

Read more at the Washington Examiner.

John F. McManus, president of The John Birch Society, said:   
    
The financial reform legislation (S. 3217) should be named the “Adding More Power to the Fed Measure.”  This 1336-page monstrosity grants the Fed additional regulatory authority and will create a new consumer protection agency that seems destined to end up under Fed control.
 
If the financial meltdown experience beginning in 2008 is correctly analyzed, the last thing any sensible person would want is expanding the Fed’s power.  Yet, the Dodd-created bill would grant policing functions over the entire financial sector.  Sending the fox to guard the chicken coop?  No thanks!  Where Fed power should be curtailed and eventually abolished, this bill will strengthen its grip on the nation’s economic life.
 
Competent scholars have shown that the Great Depression of the 1930s was brought on and made worse by the Federal Reserve.  More recent analysis of the Fed’s crimes shows that the “meltdown” of recent years was brought on by Fed action that dramatically loosened credit and stimulated the housing bubble that created the chaos.
 
As everyone knows, pouring gasoline on a fire isn’t a sensible course of action – unless one seeks a larger conflagration.  The Fed has presided over the destruction a real money and already has the nation by the throat.  Should Congress grant it more power?  No! And giving it some gasoline isn’t smart either.

Damon N. Spiegel, entrepreneur and writer, said:

There’s only so much government intervention that can occur before we’re labeled as socialists.  Health reform, job bills, financial reform, energy reform, military reform I mean how much government do we want involved in our life’s. Enough is enough.  Blaming the banks for the housing bubble is like blaming McDonalds for kids being fat.  People lied on their mortgage application, the broker lied on their application and all in the name to own a home.  Had the banks not loaned out the money, there would have suggestions that the government should get involved to ease loans to people never in their right mind should have had one to begin with.
 
Do we need financial reform?  NO.  We should have let the banks fail to begin with?  We should have let people who were in over there head find a way out.  We as the people and our government did nothing more but enable this behavior again.  If you have a family member who is a drug addict and needs money, one will often help knowing the problem will not go away.  The problem won’t go away till the government gets out of our life’s and allows for the free market to regain its strength.  I hate to sound harsh here but I’m tired of reading about all these reforms our government is putting forth. The cost is going to be outrageous and the intervention of government in our lives is going to be abused.  It is time people started to be responsible for themselves and personally hold the companies they do business with accountable.  The bank didn’t force little Joe to take a loan out and thus should be penalized for doing so.