Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, today delivered a speech to the U.S. Chamber of Commerce titled "Restoring American Competitiveness." In his speech, Garrett highlighted the ways in which the heavy-hand of the Obama administration is locking up capital and threatening American competitiveness.
Below is the full text of Garrett's remarks as prepared for delivery:
"First, I want to thank the Chamber and its Center for Capital Markets Competitiveness for inviting me to speak with you here today.
"Thanks very much, David, for that very kind introduction, and thanks to Tom Quaadman and his team for all of the good work they do, regardless of what some Beltway regulators say about you. In fact, were looking forward to having Tom testify later this morning before the subcommittee on accounting and auditing issues. Tom, you'll be happy to know that there are many members of the subcommittee that have similar concerns about mandatory firm rotation.
"But now onto the topic at hand.
"As you all know, it is a very interesting and challenging time in Washington. It's also a time of much change. Because of the ongoing economic problems our country faces, there is a great deal of pressure to ensure that Congress and the Obama administration are creating an environment that will best facilitate private sector job creation.
"While I can't speak for the White House, for House Republicans, literally priority one, two and three are Jobs, Jobs and Jobs.
"Two key conditions that are essential to having robust job creation are healthy and dynamic capital markets and the ability to access credit. My role as Chairman of the Capital Markets and Government-Sponsored Enterprises Subcommittee puts me in a very unique position to advocate for proposals to do just that.
"Last week, the Senate, the place where strong jobs bills usually go to die, decided to finally do what was right and it passed the JOBS Act.
"And while that was quite an achievement, we must not forget that the government does not create prosperity--free markets and free people do. Liberty succeeds and government coercion fails. That is history, and it is undeniable. These are the central reasons the U.S. capital markets are the deepest and most liquid in the world; indeed, they are the envy of the world.
"Unfortunately, this administration rejects history and is actively seeking to re-write the facts. The Obama White House likes to say that unregulated capitalistic forces were the reason for the recent financial crisis. I disagree. The entities that caused the crisis were regulated. AIG was regulated by the OTS. Commercial banks were regulated by the OCC and the FED. The investment banks and the securitization markets were regulated by the SEC. And the GSEs were regulated by the FHFA. Those are the facts and they are undisputed.
"The real source of the recent crisis and the breakdown in free market capitalism was the injection of government subsidies into the market and the failure of regulators to do their job, not the capitalist elements which remain despite the best efforts of bureaucrats to eradicate them.
"As a result of the policies signed into law by this president and his congressional allies, we now have a banking and financial system predominantly controlled and co-opted by the government.
"The Obama administration's policies seek to micromanage the flow of capital by strengthening the heavy-hand of government; by allowing regulators to tell banks, issuers and underwriters what to do, how to do it and when to do it; by permitting investor rights to be subordinated whenever government planners deem it politically expedient; and by pursuing new regulations that seek more control over farmers, merchandisers and small businesses in the name of financial regulation.
"In short, the freedom of the U.S. capital markets is under attack.
"In defense of this unprecedented intrusion into the financial markets, we are told that Dodd-Frank is necessary to keep the financial system safe from future crises. Time will prove this assertion wrong.
"The facts are this: central control over the financial system, which is at the heart of Dodd-Frank, doesn't end the cheap FDIC coverage that creates moral hazard, it doesn't end the "too big to fail' doctrine that prevents banks from going into bankruptcy, it doesn't end the idea that the subsidized guarantee of homeownership has failed, and it doesn't end the worst example of central planning in the U.S. economy: the GSEs.
"Our system has become increasingly subsidized and co-opted by government regulators who inevitably fail. And what do they do when they fail? They blame the private sector. Even more alarming, after those same regulators fail, they insist that all would have been well if they had more power.
"The Obama White House and congressional Democrats perpetuated this absurd argument when it passed the Dodd-Frank Act.
"The answer is not Dodd-Frank or the grant of more central power to regulators over our financial, banking and economic system. The answer is sound money, respect for private property rights and respect for the sanctity of private contract rights. The answer is removing the barriers to capital formation, removing the burdens on small banks so they can lend to small businesses and removing the subsidies that continue to prevent the free markets from working.
"The capital markets, by their very nature, are supposed to be innovative and dynamic, with the assumption being that there is a level of risk.
"In the wake of Dodd-Frank, we now have safety and soundness regulators competing with capital markets regulators to see who can regulate the risk out of capital markets first. In a capitalistic society, to have reward, you MUST have risk. If you attempt to eliminate all risk from our markets then no one will prosper, except perhaps the government.
"I believe the recent Senate debate on the JOBS Act was very instructive on this point. There were a handful of liberal senators and regulatory bodies that refuse to relinquish any current government control of our markets under the guise of protecting investors.
When arguing for greater "investor protection," the proponents equate investor protection with the false belief you can eliminate risk for investors. I would argue, however, that when you limit the investment options available for investors--you are not helping investors, rather you are harming them.
"Investor protection and capital formation is not an either-or proposition. Ensuring investors have the additional opportunities to put their capital to work and earn a return is good for investors, not bad.
"I realize that regulators feel burned by their recent failures in the financial crisis--and now they have the expected knee-jerk reaction to over compensate and ensure that no innovation or risk takes place. This is very dangerous and will have long-lasting implications for the health and competitiveness of our nation's economy unless we have a course correction.
Government and maximum regulation are not the answer--healthy, dynamic, free and innovative markets are the answer.
"With the table appropriately set, let me briefly walk you through some of the initiatives that my House Republican colleagues and I are working on to put some of this overregulation in check and make certain that our U.S. capital markets remain the envy of the world.
"I'm a lawyer, so I can say this -- one way to fundamentally reform the SEC would be to address the overabundance of lawyers at the SEC and re-emphasize economic analysis.
"There are a number of ways you could go about accomplishing this. First, you could simply hire more economists in place of some of those lawyers. That would be a good start.
"An additional step could be taken through legislation.
"Earlier this year, the Financial Services Committee passed the SEC Regulatory Accountability Act. I introduced this legislation with 14 of my colleagues to ensure that the SEC, as an independent agency, would be subject to the President's recent executive order to improve regulation and regulatory review.
"At the very least, existing regulations need to be reviewed periodically to determine whether they are outmoded, ineffective, or excessively burdensome.
"In addition, my bill would strengthen the Commission's cost-benefit analysis by:
"First, requiring the SEC to clearly identify the nature of the problem that the proposed regulation will be designed to address;
"Second, requiring cost-benefit analysis be performed by the SEC's office of the Chief Economist, and
"And finally, requiring the Commission to identify and assess available alternatives to the regulation that were considered, including modification of an existing regulation, together with an explanation of why the regulation meets the regulatory objectives more effectively than the alternatives.
"That first one, in particular, is important. And here is another opportunity for the SEC to re-think its priorities. Too often, government regulations are solutions in search of a problem; responding to sound bites or perceived problems without considering the potential unintended consequences.
"My legislation would change that. Under my bill, before regulators go too far down the road of designing a particular regulation, they would need to show just cause, through sound data and economic analysis, that there a an actual problem exists that needs to be solved.
"To me, this is common-sense reforms, especially given the fact that the Commission continues to struggle with this issue in the courts.
"For instance, in the recent unanimous opinion of the DC Circuit Court of Appeals, which vacated the Commission's proxy access rule, the Court stated that "the Commission acted arbitrarily and capriciously for having failed once again to adequately assess the economic effects of a new rule' and "inconsistently and opportunistically framed costs and benefits of the rule.'
"As the opinion alludes to, this isn't the first time that the SEC has had a rule successfully challenged in court due to substandard cost-benefit or economic analysis.
"Clearly, a stronger commitment to cost-benefit analysis by the S.E.C. is absolutely essential to ensure reasonable rules that do not unduly burden registered companies or negatively impact job creation. I hope to move this bill through the House soon.
"Another example of a successful attempt to ensure that over burdensome regulation does not strangle innovation and job creation is the recently passed JOBS Act. The JOBS Act will ease the burden of capital formation on the entrepreneurial, growth companies that have traditionally served as the U.S. economy's primary job creators. In addition, it will provide a larger pool of investors with access to information and investment options on these companies that doesn't currently exist.
"With venture capital fundraising stagnant and the IPO market largely closed off, innovative start-up companies who can't access the capital they need to grow have been forced to delay research on promising medical, scientific and technological breakthroughs. That has hurt our economy and our global competiveness because emerging companies need capital. Developing medical cures to help people live longer, healthier, and more productive lives requires capital. Developing technology to improve the speed of communication requires capital. Developing alternative energy technologies to reduce our dependence on fossil fuel requires capital.
"With the passage of this bill, we will provide those companies whose innovation and creativity in the marketplace is essential to keeping America competitive with a cost effective means to access capital and keep this country at the forefront of medical, scientific, and technological breakthroughs.
"The JOBS Act restores the incentive for early-stage investors to provide the capital that America's entrepreneurs need to set their companies on a growth trajectory to one day become publicly traded on a U.S. stock exchange.
"By chipping away at the albatross of regulation that has strangled the IPO market since the passage of Sarbanes-Oxley, this bill provides America's entrepreneurs with the access to capital they need to chase their dreams, it provides venture capital investors with the exit strategy they need to help make those dreams a reality, and it creates a welcoming environment where the next Apple, Genentech, or Starbucks can grow into a large job-creating enterprise.
"The federal government is currently guaranteeing or insuring over 90% of the U.S. mortgage market. If we are ever going to get the American taxpayers off the hook, we must get the private securitization market restarted.
"There are two things that must be done to get the private securitization market going again. One, I believe we must begin to roll back the government's involvement in the housing market. To date, the subcommittee has already passed 14 bills in this Congress aimed at reducing the government's footprint and setting the course for the abolishment of Fannie and Freddie. This is a key and vital part of getting private capital going again because as long as the cheaper government option is available, private sector capital will be crowded out of the market.
"Second, we must take actions to facilitate increased investor interest in the secondary mortgage market. By facilitating standardization and uniformity in the market, increasing transparency and disclosure, and providing legal certainty through a clear rule of law; we hope to incentivize robust investor participation in the housing market without exposing the American taxpayers to trillions of additional dollars of risk.
"To achieve this, I introduced the Private Mortgage Market Investment Act that the Subcommittee passed in December. This legislation establishes a new, Qualified Securitization market. The goal is to replicate the current deep and liquid agency market by essentially commoditizing the prime part of the mortgage market.
"New standards for underwriting and documentation will be put in place. The legislation also strengthens adherence to the rule of law and provides for increased transparency in the secondary mortgage market. This will allow for new deep and liquid private markets to be created which will ensure the flow of credit to the Housing market while not leaving American taxpayers holding the bag.
"Now that we've talked about the complicated issues, we can talk about the easy ones--Dodd-Frank Implementation and specifically Title 7!
"Because the new regulations required by Dodd-Frank will have a large impact on job creation, one of the top priorities of my Subcommittee has been to conduct an extensive amount of oversight over the rulemaking process--and I can assure you this will continue.
To put this in perspective, the last major financial services reform was Sarbanes-Oxley, which required 18 rules to be written. Dodd-Frank requires OVER 400! As a general rule of thumb, it takes on average between 2-3 years to get 1 rule right!
"Many of the rulemakings, specifically the derivatives title, the Volker Rule and the Consumer Financial Protection Bureau, if done the wrong way, could have the potential to increase uncertainty, limit credit availability, stifle job creation and force market activity overseas. This is why vigorous oversight of the rulemaking process is essential.
And in some cases, legislation is necessary. The Committee has considered and passed several bills that would repeal or fix discreet provisions of the Derivatives Title of Dodd-Frank.
"While derivatives are often vilified, they serve an extremely important risk mitigation role for thousands of American businesses and pension funds. Regulators must be mindful about not harming the functioning of a mature market and instead should focus on a regulatory structure that allows them to understand where the risk in the system actually resides.
"Dodd-Frank gave the SEC and the CFTC broad latitude to get the rules right. Unfortunately, after many of their proposals were released, virtually the entire market, from buy-side asset managers, pension funds, and commercial end-users, to sell-side dealers and even prospective swap execution facilities, told me that the regulators got it wrong.
"The Financial Services Committee recently passed a number of bills to ensure that Title VII is implemented in an orderly and constructive way that allows for proper oversight of the market but doesn't needlessly tie up capital that can be used to hire workers or invest. All of these bills have bipartisan support. This broad support should ensure passage by the full House soon.
"Another rule in the making that has the potential for serious negative consequences is the so-called Volcker Rule. As I have said before, it appears that the Volcker Rule in a lot of ways is a solution in search of a problem. It is not clear to me that the "disease' that it seeks to cure -- proprietary trading and investment in private equity and hedge funds by depository institutions -- was a significant driver of the 2008 financial crisis. It wasn't clear to the GAO either.
But even for the rule's defenders, the form it has taken as jointly proposed by the regulators is not constructive and will almost surely do more harm than good. For instance, when the rule was first proposed, Paul Volcker, himself, reportedly commented, "I don't like it, but there it is.'
"Much of the concern about the rule has been around the difficulty of figuring out the difference between proprietary trading and market making, and the very burdensome and costly compliance regime that the rule suggests.
"The end result, I fear, is that market liquidity will be restricted, which ultimately kills jobs, and investment options for depository institutions will be constrained, leading to a concentration of risk on bank balance sheets that at the end of the day could make them actually less stable than they would be without this rule.
"I agree that safer, more transparent markets should be the goal of financial reform.
"Unnecessarily over-regulating portions of our markets that do not pose systemic risks, and putting into place so-called protections in markets filled with only sophisticated users that don't want or need protections that don't make economic sense, however, is not a route we should take, especially when there are severe negative consequences on jobs and the economy.
"Over the next several months, I will work to advance the initiatives that I have discussed with you this morning and will continue to conduct vigorous oversight over a regulatory community that is trying to remove all risk and reward from our markets that too often prioritizes their own narrow focus over what is best for the American public at large."