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This week the House will consider legislation representing the single greatest threat to our capital markets in recent memory.
While cleverly named (the Wall Street Reform and Consumer Protection Act), the fundamental error in the bill is that it is built upon the belief that a lack of government involvement caused the financial collapse and the recession that has followed.
I believe history will prove just the opposite: that the steps taken by the federal government were, in fact, at the heart of the financial meltdown.
The government-sponsored enterprises Fannie Mae and Freddie Mac, for instance, were the pivotal players in the mortgage market and were largely responsible for the proliferation of sub-prime and Alt-A loans.
Additionally, the decision by the Federal Reserve (and other central banks around the world) to set negative real interest rates from 2002-06 played a critical role. Instead of mitigating the ups and downs in the economy, the Fed's actions had the opposite effect. The easy-money policy intensified the boom-and-bust cycle, misallocated capital and encouraged excessive risk-taking throughout the economy.
The fact that virtually every failed financial firm (outside of the government-sponsored enterprises) had what most people considered a competent regulator also suggests that this economic crisis was not caused by a lack of government regulation.
In fact, the assumption that the regulators better understood potential risks in the system exacerbated the problem by weakening the most effective risk mitigator out there — market discipline.
Maybe the most egregious example of a breakdown in market discipline was the Securities and Exchange Commission's handling of the Bernie Madoff Ponzi scheme. Investors and counterparties had a false sense of security because the SEC had authority over the firm. It was even rumored that Madoff would advertise SEC inspections to attract additional business. This misguided line of thinking was rampant throughout our financial system.
Instead of learning from these mistakes, the bill doubles down on a flawed approach. Case in point is the unprecedented increase in authority given to those bureaucrats who were supposed to detect and mitigate potential threats.
With the resolution authority provided in this legislation regulators will be able to rescue some companies and liquidate others. Bureaucrats will be able to pay off some creditors and not others, and keep failing companies operating and competing in the market for years. They will even be able to dismantle a healthy institution that they believe may pose a risk.
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Posted By: antisocialist(65) on 12/8/2009 | 10:59 PM ET
Royce did not say to get rid of the rules. He said the policies that were in place destabilized the financial industry. He also said the legislation being proposed by the dems is bad. Think post Soviet Russia, or Chavez's Venezuela. Also note that Royce is proposing alternative legislation that will be much more prudent. Of course you will hear what you want, and ignore the rest. Typical of a liberal.
Posted By: 417(5) on 12/8/2009 | 10:41 PM ET
Royce is right. If we just get rid of all the rules, there will be a great flowering of economic growth. That's why no one likes the NFL -- too many rules -- and why the XFL was so po***r! Mutual distrust will oil the machinery of finance and take us to new heights! He is correct that there was too much money chasing yield, but wasn't it Greenspan, the darling of the right wing, that did it? I don't remember Royce complaining then about low interest rates.
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