Frank-Dodd Bill Doesn't Address Root Causes of Crisis: Government Policies

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frank-dodd.jpgIn today's Wall Street Journal (subscription required) there is a reasoned criticism of the financial regulatory overhaul bill being debated in Congress. Written by John B. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, and author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis" (Hoover Press, 2009), the article says the bill is too complex at 2,319-pages and doesn't really get to the heart of the problem of our financial system.

For example, one big direct cause was the enormous size of Freddie Mac and Fannie Mae, which directly stoked the housing frenzy and the Fed's easy money policies that also pumped the housing bubble, Taylor says. He writes, "The biggest misdiagnosis is the presumption that the government did not have enough power to avoid the crisis." Taylor says in fact the government (The Fed) had the power, but missed its opportunities to reign in questionable lending practices and the SEC could have increased liquidity requirements to dampen questionable long-term funding activities by investment banks.

Mark A. Calabria of The Cato Institute notes, "While apologists for government-mandated lending are correct in pointing out that much of the worst lending was originated by state-chartered lenders, such as Countrywide, and not federally chartered banks, they either miss or purposely ignore the truth that these non-bank lenders were selling the bulk of their loans to Fannie Mae, Freddie Mac, or the government corporation Ginnie Mae. About 90 percent of loans originated by Countrywide, the largest subprime lender, were either sold to Fannie Mae or backed by Ginnie Mae. Subprime lenders were so intertwined with Fannie and Freddie that Countrywide alone constituted over 25 percent of Fannie's purchases."

Taylor's conclusion: "People may be waking up to the fact that the bill does not do what its supporters claim. It does not prevent future financial crises. Rather, it makes them more likely and in the meantime impedes economic growth."

Even the super-left magazine The Nation criticizes the bill, saying, "The resulting bill has several things going for it, but largely misses the critical structural lessons of the Great Financial Crash of 2008." And, in its social-justice way concludes, "As Wall Street continues to score epic profits and grotesque bonuses over the coming months, progressives must be committed to continuing the fight for a fair economy." Whatever that is.

The Nation argues that the bill leaves in place the too-big-to-fail banking structure. That point most on the Right and on the Left agree with.

As for retail financial advisors, the bill doesn't affect them much --- not until it studies the fiduciary issue further.

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