Reforms fail reality check

If Hollywood made an action movie of the financial reform plan it would produce a story featuring a mysterious Regulator.

This super brainiac could foresee systemic risk percolating before any mere bank regulator or financier could.

MY OPINION: THOMAS OLIVER
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Our superhero could calculate the billion interactions of the marketplace that take place every half hour before they even happen. Sensing trouble before it occurs, our Regulator would need only place a few phone calls, send several well-placed e-mails with Excel attachments and the worldwide financial system would be saved.

Until the sequel, The Regulator vs. The Matrix.

In truth, the Hollywood version would be more believable than Washington’s.

But what’s a crisis without a little reform?

And hurry-up reform at that. Otherwise, we might have to actually study the particulars of what brought us here. And that might shine a light where no well-heeled Washingtonian would want you to look.

Like past reforms that led directly to our Great Recession.

“We are always regulating yesterday’s problems,” says Dorsey Farr, Fed watcher and economist at French Wolf & Farr. “And we create unintended consequences that lead to tomorrow’s problem.”

For example, the Community Reinvestment Act. Enhancements in the 1990s to that reform legislation of the 1970s led directly to Freddie Mac and Fannie Mae flooding the subprime market with more money than there were legitimate borrowers.

There is little mention of that in the administration’s 89-page “A New Foundation: Rebuilding Financial Supervision and Regulation.”

There seems to be little interest in examining the roles of Congress and the Federal Reserve in laying the foundation for our Great Recession.

Just the opposite. The Fed is being rewarded with expanded powers to keep us safe and prosperous.

And Congress? They’ll get a new game for their Playstation: the Consumer Financial Protection Agency.

You know instinctively that this agency will not protect anyone. Certainly not from Congress. So, basically, we’ll get 10 more pieces of paper to sign at closing that will ensure nothing.

Most laws passed in the name of protecting consumers financially do little more than raise the cost of credit or reduce the supply of credit, Farr says.

Especially to marginal borrowers, who then need special laws to force lenders to make them loans they can’t afford.

Not even Hollywood can make this make sense.

And for those financial firms too big to succeed, the reformed financial system will have a process that results not in failure but government takeover, which isn’t the same.

The market doesn’t view government takeover as failure. It views government as a backstop. The same way we might view a spoiled rich kid whose daddy will eventually pay off his fines and debts.

This is taking bad policy – too big to fail – and making it law.

As noted economist Allan Meltzer said so well:

“Capitalism without failure is like religion without sin. It just doesn’t work.”

Thomas Oliver is a business columnist. He can be reached at

toliver.writeright@gmail.com.