U.S. Financial Reform: The Big Picture.

The U.S. financial reform bill has passed the house; but with the death of Senator Robert Byrd, the final bill won't pass the Senate until after the fourth of July recess, so the final-final details are not know as of yet and I have yet to find any article that goes into any great detail on the specifics in the new bill. In the meantime, I will take a broad and short overview on the subject and try to put it into perspective and context into the bigger picture by looking at what situation lead to the creation and passage of this bill, whose ideal this bill was, who the major authors of this bill were, and the very words of the people who authored this bill and the words of the President himself. Note that this post only covers the U.S. financial reforms as opposed to the coming Global financial reforms which I have read would have a greater impact on the banking industry,

As financial reform nears completion, the big Wall Street firms are turning their attention to new global banking rules that, if approved in their current form, would squeeze profits and lead to lower share prices[...]The reforms, which are being hammered out by the Basel Committee of global banking regulators, could make anything found in the US banking reforms look mild...

What lead to the creation and passage of this bill? The recent global economic recession. As made clear in "The House That Uncle Sam Built" that can be found in the required reading section and this nice video by Thomas Sowell, this recession was caused by government involvement and interference in the economy through its central banking policies and its involvement in the housing market. (A little side note of interest is the role that the system of credit played in the overall economic situation the world is in and the fact that the 30-year mortgage was made possible by government backing up these mortgages.) So what is the solution to a problem that was caused by government interference in the private sector? More government involvement and regulation by the very same people who authored the recent recession. Who would these people be? Barney Franks and Chris Dodd.

At the heart of the recent recession was the busting of housing bubble that was created by the government and more specifically through Barney Frank and Chris Dodd involvements in the housing market. Have they admitted that they made some very bad decisions and have they took responsibility for their part in the housing mess? No. These two are some of the major authors of this bill. So how can this bill be a good thing? What did the recent government involvement in the economy that lead to the collapse of the housing market lead to? A more active role for the government in the private sector.

What will this bill do? According to Chris Dodd, "No one... No one will know, until this is actually in place, how it works. We believe we have done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done." Implied in the statement that it took a crises to get this bill passed, is the fact that gaining these new regulatory powers have been a goal before the recession started. So is this bill designed to deal with what caused the recession or is it designed to do some other "job"? (This sounds crazy and a little scary, but these are the very words of some of our representatives and shows the mentality of some of our Representatives. Also of note is this admission by Franks.)

According to this article,

The legislation puts a lot of faith in the watchful eye of regulators to prevent another financial crisis. New agencies would police consumer lending, the invention of financial products and the trading of exotic securities known as derivatives. Bank supervisors would have the power to seize large, troubled financial firms whose collapse could threaten the entire system. The bill calls for banks to hold more money in reserve to weather economic storms but leaves the details to regulators.

A lot of faith in the watchful eyes of the regulators. Who are the regulators? "Some administration officials acknowledged that leaving so much decision-making in the hands of regulators could open the process to lobbying by the financial industry. Many bank supervisors, in fact, work inside the headquarters of the biggest financial firms and have close relationships with the executives of the companies they regulate." Having the very same people in the industries regulating that industry presents conflicts of interest. Whose interest are the regulators going to look out after? The regulators are more likely to us their government position of influence and authority to benefit their particular business or industry at the expense of everybody else, and this has the effect of combing together the normally opposing interest of government and private business. This is crony capitalism: it is the melding of government and big business. (I have read that small community banks will face new challenges as a result of finreg, and this will help do away with the smaller banks by placing them on an unfair playing field with the larger banks and has the effect of consolidating banking in the hands of a few large banks, so this bill helps to perpetuate "too big to fail".)

Here is President Obama's words after the passage of the bill,

We are poised to pass the toughest financial reforms since the ones we created in the aftermath of the Great Depression. Early this morning the House and Senate reached an agreement on a set of Wall Street reforms that represents 90% of what I proposed when I took up this fight. Now, let me be clear. Our economic growth and prosperity depend on a strong, robust financial sector, and I will continue to do what I can to foster and support a dynamic private sector. But we've all seen what happens when there is inadequate oversight and insufficient transparency on Wall Street.

What was created after the aftermath of the great depression? A larger and more active role for the government in the private sector economy. Note that the President does not believe in the private sector. When he was working in it he referred to it as "working behind enemy lines". The President got 90% of what he wanted. Looking at his political ideology and his view on what role the government should play in the economy, I would question if what he wants is actually good for the free market and freedom in general.

To sum up, there has been a very deep and protracted global recession caused by government involvement in the private sector, I know it was a little more complicated than this but this is basically what happened. Then to solve this problem, the government will give itself a larger role to play in the economy by creating new regulatory powers for itself. And of course these new powers were made up by the very same individuals who brought about the U.S. housing policy that lead to the collapse of the housing market. Was the private sector to blame? Yes, but the errors that the private sector made were the result of bad government incentives and pressure to give loans to people that should not have gotten them. As Mises stated about government intervention in the private sector, "If governments do not give them up and return to the unhampered market economy, if they stubbornly persist in the attempt to compensate by further interventions for the shortcomings of earlier interventions, they will find eventually that they have adopted socialism." I will try to do a post on all of the smaller details like "too big to fail"; bailouts, this bill makes bailouts more likely; evil credit default swaps and derivatives, the argument against them is similar to the argument against speculators; Fannie Mae and Freddie Mac, this bill does not address these two entities that back over 96% of all mortgages and were at the heart of the financial meltdown and which are now a "public policy instrument of the government" , and etc...