By Tom Coburn, M.D.
With President Obama expected to sign financial reform legislation into law in the next few days the public is hearing grandiose rhetoric about the bill's merits. The president has promised the bill will "end an era of irresponsibility" while Majority Leader Harry Reid (D-NV) said the bill will clean up Wall Street and "fix the system that caused the recession."
The public isn't buying these arguments. Four out of five Americans have little or no confidence in the bill, according to a Bloomberg Poll. Respondents also said the plan is more likely to help the financial industry than individual consumers, a fact that was confirmed by Goldman Sachs CEO Lloyd Blankfein during congressional hearings on the financial crisis. I asked Blankfein point blank if he supported the financial reform bill. He said, "on the whole, financial reform is, absolutely is essential ... the biggest beneficiaries of reform will be Wall Street itself."
In other words, the CEO of a financial institution the majority spent months demonizing supports the bill that supposedly reins in his firm. Still, the bill's backers won't acknowledge the massive disconnect between their rhetoric and their legislative product. If the CEO of Goldman Sachs supports the bill, it's no wonder the public is skeptical.
An even bigger problem than lending institutions that are too big to fail is a Congress the public views as too incompetent to succeed. The bill was written by career politicians, lobbyists and staff who have virtually no real world experience in business or investing and who, in many cases, are beholden to special interests. Few members of Congress will read the 2,300 page bill before voting on it and fewer will understand its implications.
The public doesn't trust Congress, an institution that can't pass a budget and is responsible for our $13 trillion debt, to manage and fix the dysfunctional and complex financial relationships on Wall Street. The public is also skeptical that a Congress that refuses to make rational borrowing decisions is going to effectively oversee the establishment of the Bureau of Consumer Financial Protection that will be responsible for micromanaging millions of borrowing decisions. Besides, of all the problems facing our economy, a shortage of government agencies is not near the top.
The bill has three key flaws.
First, the bill does not "fix the system." The bill fails to reform Fannie Mae and Freddie Mac, which incentivized banks to offer loans people couldn't afford. These entities have already cost taxpayers hundreds of billions of dollars in bailouts with no end in sight. As we've learned from the Gulf oil spill debacle, saying the spill is stopped doesn't stop the spill. Similarly, this bill's promises of grand reform do little to stop or prevent toxic assets from spewing into the economy now or in the future.
Second, the bills "fixes" are more likely to create uncertainty rather than financial stability. For instance, while pursuing the legitimate goal of regulating derivatives - the financial tools used to manage risk that Wall Street firms abused - Congress ended up writing a bill that treats companies like Home Depot, John Deere and Coca Cola like Goldman Sachs.
My colleague, Senator Saxby Chambliss (R-GA), the ranking member of the Senate Agriculture Committee, is warning that "requiring businesses that provide credit to our nation's producers (like the Farm Credit System Banks or John Deere Credit) to clear their interest-rate derivatives will result in higher interest rates being charged to our farmers, ranchers, electric cooperatives and renewable fuel facilities for business and equipment loans." In others words, the bill's fixes will create higher prices and fewer jobs.
The bill's fixes will also require years of complex rule making by government agencies which will create even more uncertainty and anxiety between lenders, companies and consumers at the worst possible time. Harvey Pitt, a former chairman of the SEC, aptly calls the bill "The Lawyers' and Lobbyists' Full Employment Act." The coming regulatory scramble will undoubtedly pit smaller firms against larger firms and will favor the big firms.
Finally, the bill was fast-tracked before the Financial Crisis Inquiry Commission could finish its work. The commission was created to find out what went wrong so we could prevent a similar crisis. Yet, we're passing a bill for political purposes rather than solving the problem. Congress has made an indefensible choice. Instead of passing a bill that could have created stability in the financial sector for a generation, Congress has passed a bill for an election.
In the real world no crisis is like the last one. The next financial crisis could be a liquidity crisis, a debt crisis, a crisis concerning the value of the dollar, or something else. This bill will not only fail to prevent the next crisis, but will create an economy that is weakened and less able to withstand the next crisis. Unfortunately, the financial reform bill shows the era of irresponsibility in Washington is far from over.