A Legislative Pooch Kick (Curt Bradbury Commentary)

by Curt Bradbury  on Monday, Jul. 26, 2010 12:00 am  

"The legislation is complicated and contains substantial ambiguities, many of which will not be resolved until regulations are adopted, and even then, many questions are likely to persist that will require consultation with the staffs of the various agencies involved." - Davis Polk & Wardwell LLP, an international law firm headquartered in New York

The best thing I can think of to say about the Obama/Pelosi/Reid-inspired "Dodd-Frank" financial re-regulation bill is that it is not as bad as the health care bill. But it's a very close call. Once again, as with health care, we are treated to "fill-in-the-blanks-later" legislation with more than 200 rules to be inserted after "study" by various bureaucracies. Can it be constitutional, or is it simply irresponsible, for Congress to pass legislation that is nothing more than the framework of a large hollow horse and leave it to the bureaucrats to insert the Greek soldiers later? What's that called? Representation without representation? A legislative pooch kick?

But maybe it's better left to the bureaucrats, given the wild-eyed left wing in Congress fully mounted with lances in hand, tilting at every financial windmill they can conjure up. For the first time in my career, the regulators are, so far, the calm and reasonable adults in the room compared to the bull in the china shop that is our Congress.

The irony is that what is there for us to analyze now should not comfort those who thought the object was to protect us from the next financial crisis or to punish "Wall Street," which has long been the culture warriors' bogeyman. Legislation always fights the last war, but here it's as if the drafters of this bill set out to prevent the Japanese from ever attacking Pearl Harbor again, and then proceeded to install our most sophisticated defense systems around the Bahamas.

That's what makes the president's victory laps and high-fives over this legislation so unseemly and even silly. This is no victory for the country or, frankly, even his side of the political spectrum.


Specifically and unbelievably, there is not so much as a tip of the hat to the government/private monstrosities that are Fannie and Freddie. I would wager a dollar to a dime that subsequent scholarly studies will show that the F twins and their distortion of the mortgage markets were the single most significant cause of the recent economic unpleasantness. And, if that is the case as I believe it to be, it means that government social policy was at the core of the meltdown. At the beginning of the crisis in mid-2008, 59.1percent by volume of all sub-prime and Alt-A mortgages were held, guaranteed or had been originated by Fannie, Freddie, FHA, CRA and HUD. In my opinion, this means that our government was more responsible for the financial crisis than the so-called bad boys on Wall Street! If "social justice" through "affordable housing" is the objective of our social policy, we need to ask ourselves what price we are willing to pay to achieve such a noble goal.

So what did we end up with?

  • A bill that, despite how it is advertised, does not in reality end "too big to fail" and therefore does not end the likelihood of government bailouts of "systemically important" financial institutions;
  • A limitation on derivatives activity in banks (watered down significantly in negotiation) even though there is no empirical data that shows that derivatives contributed significantly to the crisis;
  • A new free-standing Consumer Protection Agency that will heap consumer protection laws upon consumer protection laws, increasing the cost of providing consumer credit and lessening its flow to those who need it most; and
  • A new "Oversight Council" largely composed of the regulators who were supposed to be providing oversight last time; and
  • My favorite: A provision that if a systemically important financial institution fails, its competitors will be liable for costs of the failure to some extent. I think I've got it! If I work real hard and put my competitor out of business, I just may get to pay some of his creditors! Given the extraordinary reach of this legislation, if there ever is another large bank failure, it would be fairer to hold government regulators responsible instead of industry competitors. Some of us even think that the regulators had sufficient rules and reach to prevent the last crisis.

We already knew that in Obama world the answer is always more government. "Enlightened" social policy trumps all - even if it cannot be paid for. But it is even more dangerous for government to have control of credit flows in the economy than it is for it to have control of health care. This bill puts government yet closer to more aspects of the credit-granting process than ever before in the misused name of reform and a "who me?" shrug when you point to the utter failure of Fannie and Freddie. It has become clear that to our current president "reform" means "take control of it."

We have got to force our government back between the 40s and out of its left end zone. If you believe that, you cannot lose your determination when you hear the shrill cries of "Social Justice!" in defense of the government takeover of health care and banking. An all-powerful government will be just as unjust (or more so) as an all-powerful corporate sector. And there is certainly no justice in the empty promise of entitlements that cannot be paid for in exchange for votes.

(Curt Bradbury is chief operating officer of Stephens Inc. in Little Rock.)



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