Financial overhaul bill

Christopher Dodd, a Senate Democrat from Connecticut and chairman of the Senate Banking Committee, is set to introduce the Senate version of a financial overhaul bill passed in the House of Representatives in December.  Dating back to some of the original postings I made on this blog, in order for there to NOT be another financial crisis of similar proportion to the one that the U.S. and the World experienced over the last two years there are three things that have to change:

1.  The Institutions that got us into the mess have to change
2.  The people of those Institutions have to change
3.  There have to be new ideas that prevent such a thing from happening again

I am very sorry to report that there has been almost no progress on any of those three fronts.  However, Congressional Democrats are trying to address numbers 1 and 3, above.  Unfortunately, there is a lot of hue and cry from Republicans, the financial industry and from some corporations against the legislation.  I have detailed the proposed legislation in previous posts and will not reiterate the details.  However, I want to point out several things that I feel are important.

First, most of the proposed legislation is simply a restoration of legislation that was originally put into place back in the 20th Century’s Great Depression.  Most importantly was an act known as Glass-Steagall which maintained a separation between the activities of commercial and investment banks.  This legislation was systematically gutted during the Presidential Administrations of both Bill Clinton and George W. Bush.  Had Glass-Steagall continued to exist it is very unlikely that the recent recession would have been as deep, and have lasted so long.  Despite the fact that separating the two major components of the financial industry protected the U.S. for ~80 years, and shortly after its dismantling the economy had a financial crisis, most Republicans don’t support this aspect of the proposed bill.  The argument is that a separation would potentially hamper economic growth.  C’mon, that is outright ridiculous.  Just put the success of Glass-Steagall on a scale with the scale of no Glass-Steagall and see which one comes out ahead.

Second, the U.S. financial system has evolved new ways of conducting business that are not effectively covered by current legislation.  In particular, hedge funds which control a disproportionate amount of capital have minimal disclosure requirements.  If we want to have a financial regulatory structure in the United States, how can we honestly say that we don’t want those regulatory agencies to have transparency into it?  That’s like saying we want a police force, but only if they are all partially blind.  Duh!

Third, the Republican, financial industry and corporate arguments always talk about the hampering of growth of any government intervention.  But government is not just charged with provided a regulatory environment for growth – it is also charged with the responsibility to mitigate and offset risk.  The financial industry is especially hypocritical in this regard because almost every member of a financial institution (except maybe janitorial services) knows that investors are supposed to manage both return and risk.  For too long in our society the magic anti-government solvent has been to say that too much legislation chokes off growth.  I have no problem with choked growth if that means that there are no financial catastrophes.  Heck, even businesses accept lower profits when they pay for insurance of their key executives, properties, and equipment.  Isn’t a good legislative environment for the financial industry just a form of insurance?

I could go on.  But I consider opposition to the financial reform bill to be, in the long-run, both anti-capitalist and anti-American because it jeopardizes the U.S. economy’s ultimate health.

Jason