Examine Causes Before Rushing To Solution

Donald Lambro
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Posted: Apr 15, 2010 8:31 PM
Examine Causes Before Rushing To Solution

WASHINGTON -- There are good reasons to slow the rush by Senate Democrats to pass a bureaucracy-heavy financial regulation bill just to hand President Obama another legislative trophy in a tough election year.

Chief among them is to give the Financial Crisis Inquiry Commission a chance to complete its work and report back on the factors that led to the devastating subprime mortgage debacle that triggered the long recession we're slowly coming out of now.

Usually, in such cases, Congress conducts an exhaustive inquiry that is followed by a fact-filled report on what happened and why, with detailed recommendations on how to prevent such calamities in the future.

In this case, the White House and Democratic leaders are going ahead with what appears to be legislative overkill while the federal commission is in midstream, taking testimony, collecting facts and digging into the reasons the vast regulatory apparatus we have now didn't work.

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"Look at the commission that was established on the Great Depression. They found the causes first, and then Congress legislated based on those findings," says Heritage Foundation financial analyst David C. John. "In this case, the legislation comes first and the rationale for the legislation comes after."

This panel was created by Congress last year to get the answers to a lot of questions that key legislative committee chairmen were not asking as the financial industry plunged headlong into a disaster of its own making that it should have seen coming.

It is more than a little ironic that the lawmaker who wrote the bill now pending in the Senate is Chris Dodd, D-Conn., chairman of the Banking, Housing and Urban Affairs Committee, which has chief jurisdiction over the financial industry.

A lot of people in Congress and in the regulatory agencies were asleep at the switch in this case, but none slept more soundly than Dodd. He was wide awake when he needed a couple of low-rate mortgages that he got through his pals in the industry, but he didn't have much time for his regulatory oversight responsibilities while he took a year off to run for the presidency.

There were some basic reasons behind the subprime home-mortgage catastrophe: Banks abandoned decades of credit standards; allowed small or nonexistent down payments and little income documentation; and often did not fully inform adjustable-rate mortgage (ARM) customers of sky-high interest rate resets to come.

Then the financial industry bought, bundled and sold these mortgages, delivering a steady flow of high-yield income until it all came undone in a tsunami of foreclosures and bankruptcies, plunging a lot of very big institutions into ruin.

There are some very fundamental rules that need to be written and imposed to see that this can't happen again, and some of these needed changes have already occurred. (The so-called bank bailouts, by the way, are being paid with interest, and the government will show a profit.)

But Dodd and the Big Government builders in the administration have bigger targets in mind with their 1,336-page "Restoring American Financial Stability Act" that took all of 22 minutes to rush through Dodd's Democrat-dominated committee on a party line vote. They are going after sweeping regulation of an entire financial industry, and maybe even other sectors of our economy that had nothing to do with the causes of the recession.

This bill "is nothing less than an attempt to seize control of the financial services industry and to micromanage it," David John writes in a memo that needs to be read by every lawmaker on Capitol Hill.

"Unfortunately, if this ploy succeeds, the result would be an all-powerful bureaucracy that would do little to address the real problems in the industry and actually make future crises -- and bailouts -- more likely," he writes.

The White House and Democrats insist the bill would not lead to further bank bailouts. In fact, the bill would establish a new $50 billion fund to pay for closing or restructuring failing financial institutions or those on the brink of default. "This fund is certain to be used for bailing out any politically significant financial institution and is nothing less than a permanent TARP [Troubled Asset Relief Program]," John says.

And if anyone thinks that bailouts would be limited just to this $50 billion slush fund, think again. When it runs out of money, it will be replenished.

Dodd's bill scrambles the jurisdiction of a thicket of overlapping banking agencies that have been created over many decades, backing away from his original consolidation plan.

At the center of debate are provisions that would effectively put the feds in charge of micromanaging financial institutions, prohibiting insured banks from any proprietary trading on their own behalf -- needless restrictions that could weaken the industry. More problematic is a proposal by Senate Agriculture Committee Chairwoman Blanche Lincoln, D-Ark., to ban big banks from trading in almost all kinds of derivatives, a major source of revenue in commodities transactions.

Both reforms raise deeply disturbing questions about the dangers of the federal government's running the nation's financial industry -- the same people who have run Social Security, Medicare, Fannie and Freddie and the Post Office into insolvency.

Will all this new regulation prevent future excesses or poor investment decisions in the financial industry, or future economic recessions? Don't bet on it.