By Jim Demint
Published in Politico on April 1, 2010
Rather than outlawing "too big to fail" and government bailouts, the financial reform bill unveiled by Banking Committee Chairman Chris Dodd (D-Conn.) doubles-down on these bad policies. It proves yet again the Democrats' eagerness to exploit a crisis to assert control over the private sector.
If the Democrats were serious about financial reform, they would curb the power of the Federal Reserve, end "too big to fail" and start winding down Fannie Mae and Freddie Mac. It does none of these.
This bill, endorsed by President Barack Obama, is Sarbanes-Oxley on steroids.
Like Sarbanes-Oxley, it is reactionary legislation that's more likely to hurt U.S. businesses than reform the financial system. After all, Sarbanes-Oxley didn't stop Lehman Brothers from cooking their books and violating the law.
Sadly, the Democratic bill's embrace of unchecked new power for the Federal Reserve and its endless bailouts of "too big to fail banks" is sure to perpetuate the bubble-and-bust cycle -- most likely leading to another banking crisis.
This is regulation without reform. The bill doesn't contain any of the answers needed to solve the underlying problems that led to the 2008 banking collapse.
The crisis was primarily caused because too many mortgages were sold to people who weren't likely to pay them. These mistakes were magnified when the banks repackaged those mortgages and sold them to other banks, destabilizing the financial system.
Some banks, however, didn't engage in these poor lending practices. The Democratic bill doesn't distinguish between the good banks and bad banks. Instead, it severely restricts all banks' ability to lend and manage their balance sheets, further freezing credit markets.
Meanwhile, the Democrats are leaving many bad government actors untouched. For example, Federal Reserve Chairman Ben Bernanke's easy money policy fueled the housing bubble. In fall 2008, he, along with many other government regulators, missed or willfully ignored signals of the looming crash.
Though millions of Americans lost their jobs because of these mistakes, Obama has allowed Bernanke to keep his -- holding him over from the Bush administration. Bernanke, it's been said, is an arsonist who stoked the financial crisis, who is now expected to be a firefighter who can douse the flames. It's not working so far.
Instead of requiring the Fed to submit to needed oversight and limiting its reach, the Democrats are giving it even more power. Dodd's bill expands the Fed's authority, even as it remains shrouded in secrecy and refuses to provide information on which banks received trillions of taxpayer bailout money.
Before Democrats rush to give the Fed even more control of the economy, we first need all the information it has refused to share about its activities leading up to the 2008 financial crisis and the bailouts that followed.
I've championed legislation to audit the Fed. It has strong bipartisan support in the House and the Senate. A full Fed audit must be part of any real fiscal reform.
The Dodd bill also expands the Fed's reach by creating a consumer protection bureau inside it. Though it should be called the Anti-Consumer Bureau.
This office will have sweeping authority to regulate most anything considered to be financial activity -- including car dealerships that offer financing; retailers that offer credit cards, like Old Navy and Sears, and software companies that sell programs to help people manage money.
This is likely to raise costs and limit choices in products available for consumers. It means people who had nothing to do with the crisis will face new federal laws on top of existing regulations. Unleashing a new army of federal regulators to further complicate the lives of small-business owners can only hurt consumers, kill jobs and discourage investment.
The Democratic bill ignores the clamor for more accountability by granting the Federal Reserve more power without getting any real oversight in return.
That's not the worst. The bill institutionalizes the concept of "too big to fail" by taxing banks that the Treasury, the Fed and Federal Deposit Insurance Corp. says are too important to close. The money will create a $50 billion bailout slush fund that can be used to rescue them if needed.
This essentially creates a circle of protection around big banks -- a significant advantage over smaller banks and credit unions.
Perhaps most shocking about this bill, however, is it does nothing to address the two biggest culprits in our financial crisis: Fannie Mae and Freddie Mac. In fact, this administration rewards them with an endless bailout.
These government mortgage companies, which hold $5 trillion in debt, were ringleaders in the chain of buying, securitizing and spreading toxic, subprime loan assets that led to the financial collapse. But, despite their failures, taxpayers have been forced to give them $111 billion since the government took control in 2008.
And there's no end in sight. On Dec. 24, Treasury Secretary Timothy Geithner handed them a blank check from taxpayers, lifting the $400 billion cap on government aid and guaranteeing unlimited taxpayer bailouts in the future.
Dodd should have focused on issues where there is general agreement -- like ending "too big to fail" bailout policies, getting more information from the Fed and shutting down Fannie Mae and Freddie Mac.
The Democrats took control over the health care system by forcing their health care "reform" bill through Congress. Don't be fooled. This is another Big Government power grab masked as "reform."
Sen. Jim DeMint (R-S.C.) is on the Banking, Housing and Urban Affairs Committee.