Big Doubts Surround Financial System Overhaul Bill

Big Doubts Surround Financial System Overhaul Bill
July 14, 2010

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

President Barack Obama on Wednesday signed into law a massive financial overhaul bill that he and the bill’s supporters say will protect the economy, businesses, and individuals.

His signing of the bill came just days after the U.S. Senate passed the measure, which covers some 2,300 pages and 390,000 words. The House of Representatives had already passed it.

More Government Control
The measure gives the federal government more control over most aspects of the nation's financial industry. Among other things, it directs regulators to create hundreds of new rules touching on things as fundamental to consumers as mortgage underwriting and debit and credit card transactions to esoteric activities such as hedge fund operations and derivatives trading. It also creates a systemic risk regulator and gives the government new powers to shutter or take over institutions it deems necessary, and creates a new consumer financial protection bureau.

The bill passed along largely partisan lines, as only three Republicans in the House and three in the Senate supported it.

“This reform is good for families, it's good for businesses, it’s good for the entire economy,” President Obama said on July 15, shortly before Senators passed the bill.

Concerned Economists
Others say it will be bad for families, bad for business, and bad for the entire economy.

“The bill makes regulation even more complicated and therefore open to manipulation; firms subject to this regulation will innovate around it with ease,” said Harvard University economist Jeffrey Miron. “Worse, the bill fails to rein in and may increase the moral hazard that results from the too-big-to-fail doctrine. The bill also does nothing to reform—i.e., eliminate—Fannie Mae and Freddie Mac, two central factors in the recent crisis.”

“Ultimately this legislation was written by financial interests, and it will predictably provide them with benefits,” said Mark Thornton, a senior fellow at the Mises Institute in Auburn, Alabama. “If giving government more regulatory power was the answer, then there would already be fewer financial shenanigans, rather than more. Sarbanes-Oxley was passed [in 2002] after the previous bubble and was supposed to prevent such shenanigans, but of course it did not and could not do so.

“Government regulation only gives the appearance of consumer protection and encourages consumers to let down their collective guard. This new legislation will hurt most Americans and will only set them up for another round of exploitation,” Thornton added.

Consumer Protections
Robert Ekelund, Lowder Eminent Scholar Emeritus at Auburn University, said he largely agrees with Thornton but likes some of the consumer protections propositions in the bill. The bill includes creation of a consumer protection bureau.

Ekelund puts some blame for the financial crisis on “industry-inspired ‘deregulation’ in 1999 and 2000” that allowed banks to get into the financial services industry and to count purely financial assets as "capital" on their balance sheets.

Before long, Ekelund said, “Derivatives and other instruments were floating around with little or no reserves! Wild West banking ensued. This plus Fannie and Freddie and the Federal Reserve pushing interest rates below zero [relative to price inflation] were all ultimate causes of the crisis.”

He added, “Why give the Federal Reserve more power when they were a cause of or at least facilitated the last bubble?”

Crony Capitalism
Daniel Sutter, an economist at University of Texas-Pan American and a senior scholar with the Mercatus Center at George Mason University, said he fears “politicization of the economy” because of the bill and “crony capitalism where political connections are more important to success in business than producing goods and services that consumers value.”

He noted Fannie Mae and Freddie Mac are untouched by the bill and said, “Fannie and Freddie symbolize one of the most dangerous elements of politicization of the economy: government assumption of losses. . . . When the losses can be shifted to taxpayers, investors take on excessive risk.”

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and editor of FIRE News.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)