As Usual, Government Regulation as Political Payoff
I heard the president’s speech at Cooper Union College today and thought it was quite bizarre that he would criticize Wall Street for bad behavior when Washington is currently running our national debt through the roof and the policies that emanated from there in the last ten years caused our current financial crisis. The old adage about those that live in glass houses and stone throwing immediately came to mind. But, the president really believes that the financial crisis we still find ourselves in despite trillions of dollars in Keynesian spending is somebody else’s fault. In fact, he indicated that, “…the system as it stands is what led to a series of massive, costly, taxpayer bailouts.” And I thought it was Mr. Obama and his big government colleagues in the Congress who voted unconstitutionally to give away our money to the greedy, misbehaving banks.
Now, the president’s bizarre remarks are one thing, but the financial regulation bill before the Senate is even more bizarre. Crafted by Connecticut Senator Chris Dodd, the bill will do nothing to fix the real causes of the financial crisis. In actuality, the bill amounts to nothing more than a political payoff for Dodd’s benefactors on Wall Street. And this should come as no surprise since Dodd’s donor list reads like a who’s who of the financial services sector.
First of all, Dodd’s bill does nothing to address the primary culprit of the financial crisis – the Federal Reserve. Yes, consumers took out mortgages they could not afford and loan officers falsified applications knowing that they would collect their commissions long before the bad loans defaulted on a bigger institution up the line. But the Fed supplied the poison for it all to happen – easy money. After 911, Alan Greenspan’s Fed kept interest rates artificially low at 1 percent for three years. This encouraged a mortgage craze as trillions of dollars were borrowed. It was a government sponsored get rich quick scheme as many housing investors bought homes with low teaser rates and no money down. You know the rest of the story – homeowners leveraged their homes to the max, rates adjusted up and the bubble burst when many folks could no longer afford their payments. To add insult to injury, the Fed came to the rescue of financial institutions, even foreign ones, at the expense of taxpayers. Make no mistake about it, the Federal Reserve exists for the profit making of banks alone. It was established by bankers; it is run by bankers; it allows banks to inflate dollars through fractional reserve banking; and it is there for them when they need a few dollars to keep the charade going. No other industry has a full government agency to support its shady dealings like the banking industry. Dodd’s bill, by ignoring the Fed’s culpability in the crisis, has no chance of preventing financial calamities in the future. Additionally, it only benefits the big banks since their benefactor, the Fed, will continue to operate unencumbered by any new regulations or oversight.
If ignoring the Fed’s role in the financial crisis is not bad enough, Dodd’s bill also institutionalizes “too big to fail” bailouts. It should be pointed out that a major rationale of financial reform is to ensure that taxpayers never again get stuck with bailing out firms that are too crucial to our economy to fail. Well, Section 113 of the bill provides for a “Financial Stability Oversight Council” which would identify distressed firms whose failure would “pose a threat to the financial security of the United States…” Section 210(n)(1) establishes an “Orderly Resolution Fund” within the U.S. Treasury that would provide $50 billion in bailout money funded by taxes on financial firms. Of course, ultimately those taxes would come from consumers in the form of higher bank fees. These two sections of the bill essentially provide implicit guarantees from the government against failure for big banks. They extend the life of the moral hazards that we have become too familiar with. In the end, they will encourage big banks to continue to take undue risks which will once again put taxpayers in harm’s way. These sections of Dodd’s bill will not prevent future financial crises. On the contrary, they only benefit big banks by allowing them to risk everything with the knowledge that taxpayers will be there to pony up bailout funds for them.
Since 1989, Chris Dodd has received over $12 million in campaign contributions from the financial services industry. They own him and this bill proves it. On the other hand, the president is yet to embrace Dodd’s bill. In his speech at Cooper Union he said to financial firms, “I want to urge you to join us, instead of fighting us in this effort.” If he chooses Dodd’s bill to reform the financial industry he probably won’t get much of a fight from Wall Street.
Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina.