The further to the left or the right you move, the more your lens on life distorts.

Tuesday, June 29, 2010

Chris and Barney—Redux

Immediately after the stock market crash of 2008, the resultant failures of huge investment banks, and the follow-on tax-payer bailouts of many “too big to fail” institutions, I wrote:
Those of us who pay for 70 percent of government don’t ask for much, but we’d love to see the new president stress and/or force responsible actions for all of the bad guys in this drama—less debt at an individual level; ethical behavior among lenders; reform among politicians who worry more about their reelection than their country, and regulation of Wall Street’s children of Gordon Gekko whose extreme hubris and greed led us all into this mess.

Now, almost two years later, we're still waiting. The geniuses who were part of the problem have crafted a financial reform bill that will do nothing to punish the irresponsible behavior of those who precipitated the original crisis and even less to help avoid another debacle in the years ahead.

The fact that Chris Dodd and Barney Frank are the primary authors of the proposed legislation speaks volumes about modern day Washington and the clear lack of leadership by the Obama administration. Both Dodd and Frank were at least partially culpable for the original crash and have done nothing to redeem themselves in the intervening months. Their proposed legislation is a replay of the health care legislation that the Democrats rammed down the throats of a less than enthusiastic public—too big, too ambiguous, misdirected, and worse of all, solving the wrong problem while leaving the taxpayers (a continually shrinking percentage of the populace as a whole) on the hook for wrong-doing by the Wall Street masters of the universe.

Nicole Gelkina summarizes the situation nicely:
The compromises hammered out by Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.) and others don't address their bill's fatal flaws -- starting with the bill's disastrous effort to end taxpayer bailouts.

The obvious— and correct—way to end Wall Street rescues is to let a failed financial firm go bankrupt. That is, the people who invested in a failed company—including bondholders, people owed money on derivatives and other lenders—should take the losses.

Instead, Congress would "end" bailouts by directing the feds to rescue the creditors to any failed "too big to fail" financial company. Later, the feds would make the failed firm's competitors pay the cost.

Don't buy the claim that this is similar to our 80-year-old system of deposit insurance. Deposit insurance is meant to protect mom-and-pop savers, not sophisticated global investors. And because there are only so many small-scale American savers with a finite amount of cash saved up, any single bank's risk of having to make good on a failed firms' FDIC-insured deposits is limited, and roughly predictable.

By contrast, Dodd-Frank would force financial institutions to shoulder an unknowable and unpredictable risk -- but one that stands a good change of being huge.

Worse, the approach encourages wild risk-taking -- and penalizes prudence.

Perfect! Encouraging wild risk-taking and penalizing prudence. That’s what got us in this mess in the first place.

Luckily, Dodd chose not to run for re-election (he’ll be gone in November) but Frank is unassailable in his district, and President Obama has a minimum of 2.5 years to do even more damage. And folks wonder why the markets are roiled, unemployment remains close to 10 percent, and the economy is stagnant.