Congress delivered to the President on July 15 a 2,000-page sweeping rewrite of rules governing the financial system, including banking. This is more government than is needed and an intrusion into the free-market system.
This proposal is in response to the mortgage meltdown, the financial crash and the resulting recession, and in my opinion it’s much more regulation than is needed to fix the problem. It will confuse consumers, strangle capital formation and stifle competition.
It is another Sarbanes-Oxley, which became effective for small companies June 16. The Sarbanes-Oxley Act of 2002 (SOX) is a colossal failure, poorly conceived and hastily enacted during a regulatory panic. Congress did the same thing with financial reform. Already there are an excessive number of government agencies that have the power to regulate the financial industry, like OCC, OTS, SEC, FDIC, CFTC, NCUA, HUD, FTC, MSRB, Treasury and the Federal Reserve, not to mention Congress.
What went wrong was a failure of government oversight and enforcement. Money managers and Wall Street will always find a way, legally, around regulation. Derivatives, credit default swaps, mortgage-backed securities, and hedge funds all were created to circumvent regulation. Congress, the Federal Reserve, the Treasury, and the Securities and Exchange Commission did nothing to rein them in. Elimination of the Glass-Stiegel Act took away the firewall between deposits and Wall Street financial firms.
The rocket fuel that created the bubble was the Federal Reserve’s loose-money policy. That is basically what needs to be fixed. The Financial Reform legislation does address these issues, but with a heavy hand. We do not need another consumer protection agency or stifling regulation.
This whole thing started back when I was in Congress. I was the only stockbroker in Congress at the time. During the early 1970s, Congress passed the Community Reinvestment Act and President Jimmy Carter signed it into law. It was also called the anti-red-lining law. It forced banks to make mortgage loans to folks who did not have good credit. It was all about the notion that it is the American dream to own a home. This propaganda has been preached by every president and every Congress, and they have done everything they could to help it along. Owning a home is the American dream, but so is owning a car, putting your kids through school and paying your bills. Government’s involvement in the housing market has given people a false notion of hope. Just look at the misery, disappointments, family disruption, foreclosures and bankruptcies that have resulted because government was trying to fulfill this dream.
Government-sponsored enterprises Fannie Mae, Freddie Mac and FHA were all created to work with mortgage lenders to help people get lower housing costs and get better access to home financing. These monstrosities drove demand by purchasing everything the mortgage industry produced, even toxic paper, which pushed prices out of sight until the bubble burst. Today, instead of trying to keep housing prices high, we need to let the prices decline to a point at which ordinary people can afford to buy homes.
Parts of the Financial Reform Act will help, but most is overkill. What is needed is agency enforcement of laws already on the books. Any new securities or financial instruments such as derivates, hedge funds and credit default swaps need to be put under regulation. The Federal Reserve needs to account for its actions. Congress once again has tried to do too much and does not know the consequences of its actions. This is another government boondoggle.
— Barry M. Goldwater, Jr., is a former U.S. representative from California.