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Issue Report: Restoring American Financial Stability Act of 2010

Should the US Congress adopt financial reform legislation?

Background and Context of Debate:

The financial crisis of 2007-10 was triggered by a liquidity crisis in the United States banking system. It has resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity. , The severe economic downturn led to widespread calls for changes in the regulatory system. On June 17, 2009 President Barack Obama introduced a proposal for “sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.” The full proposal is 89 pages long. In December, Democrats in the House passed a bill largely along those lines. In the Senate, the bill stalled during bipartisan negotiations. Last week, the Administration and Senate Democrats sought to make what they said was a compelling case for financial reform of banking regulation and financial markets. The Restoring American Financial Stability Act of 2010, sponsored by Senator Christopher J. Dodd (D-CT), introduced in March after months of development, appears to be positioned for approval even though no Republicans support the current version. It encompasses such diverse matters as changes in consumer finance regulation, a special council of regulators to impose new prudent risk standards on systemically significant financial institutions, and new rules for hedge funds and derivatives. The debate below will focus on whether or not the US Congress should adopt financial reform legislation.

Free markets: Is reform consistent with free market capitalism?

Capitalism is wonderful, but requires regulations

Timothy Geitner. "Financial reform with teeth." The Washington Post. April 13, 2010

“The best way to protect American families who take out a mortgage or a car loan or who save to put their kids through college is through an independent, accountable agency that can set and enforce clear rules of the road across the financial marketplace. […] A clear lesson of this crisis is that any strategy that relies on market discipline to compensate for weak regulation and then leaves it to the government to clean up the mess is a strategy for disaster.”

Dane Smith. "Barney Frank makes case for financial reform." Minn Post. May 11, 2010

“the United States is a ‘private-sector society’ that depends on capitalism for wealth creation, but affirming also that the government has a proper role in ‘setting the rules.'”

Regulation limits risk and sustains consistent economic growth

Timothy Geitner. "Financial reform with teeth." The Washington Post. April 13, 2010

“the best strategy for stability is to force the financial system to operate with clear rules that set unambiguous limits on leverage and risk.”

Free market does not give free license to greed.

President Obama

“A free market was never meant to be a free license to take whatever you can get, however you can get it. That is what happened too often in the years leading up to the crisis. Some on Wall Street forgot that behind every dollar traded or leveraged, there is family looking to buy a house, pay for an education, open a business, or save for retirement. What happens here has real consequences across our country.”

Free market constrains risk-taking by letting banks fail

" Senate Financial Reform Bill: More Bailouts & Fed Power". The New American. May 2010

“The primary argument for the American Financial Stability Act of 2010 has been that government should stop excessive risk-taking by financial firms. In a free market, firms that take lots of foolish risks go bankrupt and are removed from the economy (thus ending the threat). The threat of bankruptcy offers a strong incentive for prudent business practices.”

Financial regulatory bureaucracy risks future crises/bailouts

David C. John. "Dodd Financial Regulation Bill: Super Regulators Not the Answer". The Heritage Foundation. May 2010

“Unfortunately, if this ploy succeeds, the result would be an all-powerful bureaucracy that would do little to address the real problems in the industry and actually make future crises—and bailouts—more likely.

Banks should be making market decisions, not govt

"Can the Senate finance bill curb Wall Street?". Kansas City Star. May 2010

“We have a bill that essentially says, ‘Trust us, we’ll sort this one out.’ That is, trust the infinite wisdom of Congress and the regulatory agencies to steer us through the inevitable next crisis.”

Argument: Fin. reform will stifle small business, community banks.

"Dodd Financial Regulation Bill: Super Regulators Not the Answer". David C. John. The Heritage Foundation. May 2010

“Ironically, the Senate Banking bill ends up giving it even greater powers over major financial services firms than it has now (even though it does strip the Fed of its jurisdiction over small banks). Although the new council of regulators is given the power to recommend and approve Fed actions, the actual power to design and implement such actions goes to the Federal Reserve.”

Too much, not too little, govt regs responsible for US crisis

"Dodd Financial Regulation Bill: Super Regulators Not the Answer". David C. John. The Heritage Foundation. May 2010

“Ironically, the Senate Banking bill ends up giving it even greater powers over major financial services firms than it has now (even though it does strip the Fed of its jurisdiction over small banks). Although the new council of regulators is given the power to recommend and approve Fed actions, the actual power to design and implement such actions goes to the Federal Reserve.”

Too much, not too little, govt regs responsible for US crisis

" Senate Financial Reform Bill: More Bailouts & Fed Power". The New American. May 2010

“The Federal Reserve — by suppressing interest rates below free market rates for nearly a decade before the crash — is without a doubt the government agency primarily responsible for the current Great Recession.”

Financial crises are part of free markets; govt shouldn't over-react

Ben Briscoe. "Banking reform." American Thinker. April 6, 2010

“Painful as it is, a free-market capitalist economy is going to ebb and flow. But big government has aggravated the severity of our current financial meltdown as well as contributed to the stymied recovery — similar to what happened in the New Deal of the 1930s. This administration is following suit, and their financial reform legislation will stymie or derail a robust recovery.”

Efficacy: Will financial reform legislation prevent future crises?

2010 reform expands "shock-absorbers" for nex financial crisis

Timothy Geitner. "Financial reform with teeth." The Washington Post. April 13, 2010

“Ending ‘too big to fail’ also requires building stronger shock absorbers throughout the system so it can better withstand the next financial storm. To do that, the Senate bill closes loopholes and opportunities for arbitrage, and it brings key markets, such as those for derivatives, out of the shadows. […] Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system.”

Financial reform bill is essential to restoring US credibility

"Restore credibility to the U.S. financial system." Seattle Times. March 23, 2010

“A comprehensive package of financial regulatory reforms voted out of the Senate Banking Committee is fundamental to restoring that credibility and rebuilding the strength of the economy.”

Goldman Sachs fraud case highlighted need for financial reform

Mil Arcega. "Charges Against Goldman Sachs Boost Case for Financial Reform." VOA News. April 19th, 2010

“The Obama administration’s efforts to reform the financial industry is getting an unexpected boost after the Securities and Exchange Commission (S.E.C.) accused one of the largest U.S. investment bankers of fraud.”

2010 financial reform increases transparency

"Jim Webb: The case for financial reform." August Free Press (Virginia). May 12, 2010

“Transparency. The American people deserve to know where their tax money goes. The TARP program was only the most visible of the taxpayer-financed bailouts of the financial industry; the Federal Reserve also provided hundreds of billions of dollars in other assistance as well. I am a cosponsor of an amendment that would require an audit of the Federal Reserve, in order to determine the extent of the taxpayer assistance that was provided to these private companies.”

Financial reform puts onerous regulations on free markets.

One New Yorker said to New York 1 news

“I don’t feel very well about it. I think that we’re a free enterprise country and I don’t like too many rules and regulations that they are trying to impose on Wall Street.”

New reforms make regulations equally complex and vulnerable.

David C. John. "Dodd Financial Regulation Bill: Super Regulators Not the Answer". The Heritage Foundation. May 2010

“It is hard to see what if any benefits would come from this wholesale rearrangement of responsibilities. Since most major holding companies still contain subsidiaries that would be regulated by the SEC, Commodity Futures Trading Commission, or another regulator, the overall financial regulatory system would remain about as complex as it is now. Gaps that remain in the existing system would continue to exist, so there would be little benefit to thousands of financial institutions shifting to new regulators that may interpret existing rules differently from their existing overseers.”

2010 US financial regs will likely reduce lending/growth.

"Can the Senate finance bill curb Wall Street?". Kansas City Star. May 2010

“This is a complex issue that could have unintended consequences on job growth, the ability of Americans and business owners to access credit, and the United States’ role as a worldwide leader in innovation and capital formation. The consequences of this bill will reverberate across our economy for years to come.”

Crisis caused by govt-sponsored mortgage giants, not Wall Street

2010 financial reform protects big banks, harms smallest.

Republican Leader John Boehner (R-Ohio) said Democratic proposals would “protect the biggest banks in America and harm the smallest banks” and make it harder for community banks to make loans to small businesses.

"Too big to fail": Does financial reform address this issue?

2010 US financial reform ends "too big to fail"

"Obama: Derivatives Require Strong Federal Oversight". The Huffington Post. April 2010

Economist Austan Goolsbee: “Bailouts are forbidden. There will only be wipeouts. They (the banks) will clean up the messes. If somebody fails, they’re done – they’re toast. The management is fired. They’re broken up or sold off or liquidated.”

2010 reforms enable orderly dismantling of failing banks

Timothy Geitner. "Financial reform with teeth." The Washington Post. April 13, 2010

“if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts. Instead, we will have a bankruptcy-like regime where equity holders will be wiped out and the assets will be sold.”

2010 reforms limit size of banks and risks of failures

"The Hard Work on Financial Reform." The New York Times Editorial. May 4, 2010

“TOO BIG TO FAIL Senators said Tuesday that they had reached an agreement on how to pay for seizing and dismantling big banks whose imminent failure could destabilize the system, but that doesn’t confront the more difficult issue of how to cut big banks down to a less threatening size. The Senate bill calls on regulators to impose higher capital requirements on riskier institutions. The aim is to make size and complexity so expensive that banks opt to restrict their size, but the new rules are unlikely to be enough.”

2010 financial regs won't end "too big to fail" and bailouts

" Senate Financial Reform Bill: More Bailouts & Fed Power". The New American. May 2010

“No matter how foolish the investment, under the Senate bill financial firms on the losing side of a financial bet would always be able to call on government bailouts in the future.”

2010 banking reform perpetuates "too big to fail" policies

"McConnell: GOP has votes to stop bill". MSNBC. April 2010

“We simply cannot ask the American taxpayer to continue to subsidize this ‘too big to fail’ policy. We must ensure that Wall Street no longer believes or relies on Main Street to bail them out. Inaction is not an option. However, it is imperative that what we do does not worsen the current economic climate or codify the circumstances that led to the last financial crisis.”

Banks bigger than ever; new regs won't end "too big to fail."

"Can the Senate finance bill curb Wall Street?". Kansas City Star. May 2010

“The whole ordeal that has played out over the miserable months since the collapse of Lehman will hit us again within the next decade, only this time the banks will be bigger and more systemically important than ever. The regulators and policymakers who are supposed to prevent the next crisis will be on autopilot.”

Consumer protection: Is this new agency important?

2010 financial reform offers important consumer protection

"Jim Webb: The case for financial reform." August Free Press (Virginia). May 12, 2010

“Consumer protection. Abusive lending practices have proliferated in recent years, with little oversight or regulation. I am a cosponsor of two amendments that would crack down on outrageous credit card rates, by allowing states to regulate interest rates within their own borders—as they could prior to 1978—and by capping the maximum allowable rate at 15%. I also voted to preserve a strong, independent consumer protection agency that will have the ability to conduct meaningful oversight, while exempting smaller banks and other businesses from potentially onerous regulations.”

Banks shouldn't blame borrowers for taking risks

"Why Consumers Need Financial Reform." Money Watch. April 2010

“What angers me most about Wall Street’s shady dealing and greed is that that they like to blame the national meltdown on their customers. You’ve heard their sniffy defense: People took mortgages they couldn’t afford, lied to lenders about their incomes, and deserve whatever they got. The poor little ole mortgage bankers and investors were the innocent victims of shocking consumer misbehavior. The banks had no idea — absolutely none — that when the scheduled interest rate ratcheted up on subprime loans, borrowers might not be able to pay.”

Consumers can be protected w/o new financial bureaucracy

"Pros and cons of Obama’s financial reform proposal". By Edward L. Yingling. The Hill. May 2010

“Wherever there are perceived weaknesses in the protection of consumers by regulated depository institutions — banks and credit unions — they should be specifically addressed, but not by the creation of yet another regulatory agency.”

2010 financial reform exposes sensitive information

"Big Brother loves 'financial reform'" Washington Times. April 30th, 2010

“The legislation, sponsored by Senate banking committee Chairman Christopher J. Dodd, would create the innocuously named Office of Financial Research as a central repository for transaction-related records held by financial companies. According to proponents, “decision-makers” like Mr. Geithner need up-to-the-minute information to act in order to prevent what they refer to as another Wall Street meltdown. The proposed agency would also provide statistical analysis and research, purportedly to monitor systemic risk to the financial system. […] the details of the proposal show that this new agency’s mission is not meant to be limited to improving the quality of financial data. Mr. Dodd’s legislation would grant the agency director the coercive power of subpoena to obtain records and rulemaking authority to force private-sector firms to maintain their internal financial records in a format acceptable to the government. The legislation also grants sweeping authority to maintain a data center that would collect and maintain ‘all data necessary’ to carry out the director’s wishes. Needless to say, the government’s history of losing hard drives and laptops filled with sensitive information suggests entrusting more to a federal agency is not a smart idea.”

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