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Editor/Founder: Bill Smith, Ph.D. [aka: OzarkGuru & 2010 AFP National Blogger of the Year]
Contact: editor@arranewsservice.com (Pub. Since July, 2006)
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One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato (429-347 BC)

Monday, May 03, 2010

Today in Washington, D.C. - May 3, 2010 - Economic Experts Agree That Omission of Reforms for Fannie & Freddie Is Outrageous

The Senate resumes consideration of S. 3217, the Dodd financial regulation bill. No votes are scheduled for today.  Pending to the bill is the first Democrat amendment from Sen. Barbara Boxer (D-CA), which is designed to prevent taxpayers from being on the hook for more bailouts. Democrats had previously spent two weeks claiming bailouts were not in the bill.

As the Senate begins floor consideration of Senate Banking Committee Chairman Chris Dodd’s (D-CT) financial regulation bill this week, more and more questions are arising as to whether the bill adequately addresses problems with the financial system. Republicans have been warning for weeks that the bill won’t end “too big to fail,” could vastly expand government regulation into unintended areas, and doesn’t tackle the problems of Fannie Mae and Freddie Mac. Today, The New York Times reports that a number of economic experts share the same concerns.

The Times writes, “[S]everal prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis. Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market, including the future of the housing finance companies Fannie Mae and Freddie Mac. Others simply argue that it is premature to pass sweeping legislation while so much about the crisis remains unclear and so many inquiries are in progress.” The Times further notes, “Senate Republicans echoed some of these concerns as they delayed debate on the legislation last week.”

According to the NYT, “Gary B. Gorton, a finance professor at Yale, said the financial system would remain vulnerable to panics because the legislation would not improve the reliability of the markets where lenders get money, by issuing short-term debt called commercial paper or loans called repurchase agreements or ‘repos.’”

Further, “Lawrence J. White, a finance professor at New York University, said it made no sense to overhaul financial regulation without addressing the future of federal housing policy. He said he was trying to find the strongest possible words to describe the omission of Fannie Mae and Freddie Mac from the legislation. ‘It’s outrageous,’ he finally said.”

And MIT finance professor Andrew W. Lo told The Times, “Until we understand what the causes were, we may be implementing ineffective and even counterproductive reforms . . . . I understand the need for something to be done. But what I expect from political leaders is for them to demonstrate leadership in telling the public that we need to proceed about this in a much more deliberate and rational and thoughtful way.”

Meanwhile, FDIC Chair Sheila Bair expressed concerns about another provision in the Dodd bill. According to The Wall Street Journal, “Bair has urged lawmakers to scrap a controversial Senate plan that would force banks to spin off their derivatives businesses, saying it could destabilize banks and drive risk into unregulated parts of the financial sector.  Coming from the head of the agency in charge of protecting deposits in the U.S. banking system, Ms. Bair's comments could command attention, particularly because she has often been critical of big banks, and has called for curbs on their activities. In this case, however, she's suggesting proposed curbs might go too far.”

The WSJ points out, “In her Friday letter, addressed to Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.), Ms. Bair said the bill could force $294 trillion in derivatives contracts outside of federally regulated banks and into companies such as hedge funds and foreign banks ‘beyond the reach of federal regulation.’ Republicans have been very critical of the provision, and Sen. Judd Gregg (R., N.H.) last week said that the legislation would chase the derivatives industry overseas and into dark corners.”

Though Democrats are in a rush to pass a bill to rein in Wall Street, it’s clear that they haven’t taken the time to consider the practical effects of what they’re proposing while at the same time they’ve completely ignored other problems such as Fannie and Freddie and may be creating new ones such as driving derivatives contracts overseas. The Dodd bill is not even close to ready for primetime. It needs significant changes during floor debate.

Tags: Washington, D.C., US Senate, US Congress, Dodd Bill, financial regulation To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. Thanks!
Posted by Bill Smith at 1:52 PM - Post Link

1 Comments:

Blogger Matt said...

The reform bill isn't about reform. It's about more central control. It's about keeping the crisis going by failing to address any of the core reasons for the current crisis.

5/03/2010  

Post a Comment

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