ON FINANCIAL SECTOR REFORM and REGULATION

By Peter Bearse

Republican Candidate NH CD1

Is it any wonder that our economy is screwed up? -- When Congress can’t even ask the right answers, let alone get to reasonable answers on the need for reforms in the financial sector, or in Congress itself -- so as not to screw up another sector of the economy. The key issue which Congress avoids is distribution of power, not only between the private sector and government, but within the private sector itself. Avoidance has consequences. One is that government will continue to be part of the problem because a Democratic Congress mistakenly assumes that it’s the major part of the solution to any problem. Another is that the economy will be rendered less dynamic. Government intervention into any sector of the economy favors the financial powers-that-be to the disadvantage of the smaller fry -- small, community-based banks, small business and entrepreneurs. As I noted in earlier releases, government and big business, on balance, destroy jobs; smaller actors create them. An American economy guided by big government bailing out big banks is in danger of riding on the same rails as Japan from 1990 to about 2002 -- low growth and high inflation -- “stagflation.” 

Congress puts the country in danger when it sets to solving the wrong problems. It often does so by overreacting to media headlines rather than trying to get to the root of problems. So, rather than finding ways to get the financial sector to serve the real economy, Congress comes up with “reforms” that serve the sector and itself. Why? -- because it starts with a misleading diagnosis: that the core problem is that the burden of bailouts falls too much on taxpayers. Then it starts down a misguided path guided by the influence of big money contributions to help Members’ reelection. So, if you want to know what’s happening with financial regulation -- “Follow the money!”

Thus, as in the case of the earlier un-healthy concoction carrying a “reform” label, we face a huge bill…

*     Whose implications for the future are poorly understood and too little debated;

*     That does not eliminate either significant chances of future bailouts, nor of taxpayers being put on the hook for them [The latter is hidden in the section on FDIC “loans”];

*     Whose risk-management via governmental regulation threatens to put dampers on the prime drivers of our economic progress -- entrepreneurship and innovation; and…

*     Whose solicitous care and favoritism for the big boys spells a big imbalance in the economy: Investors will favor big banks and corporations over small, community-based banks and more entrepreneurial enterprises. The market and political power of the big would grow. The corruption of Congress would increase, threatening the foundation(s) of our Republic.

What features need to be included in a real reform package that would finance real American enterprise, not a casino economy? [1] There are eight (8):

*     Non-bank financial companies need to be regulated as banks if any part of the corporation takes deposits.

*     “Standard” derivatives’ trading should be moved out of banks into public trading exchanges. “Customized” trading can continue through in-bank “desks“, but with federal agency oversight.

*     Securities’ underwriting and trading needs to be regulated, and incentives provided, so that banks and other financial institutions provide more patient money for business’ start-up and development, not incentives for “flipping” investments to make quick bucks.

*     Existing financial regulatory agencies need to be consolidated, trimmed and refocused rather than adding another, new agency to an already cumbersome bureaucratic layer-cake.

*     The attitude that some big banks are TBTF -- “Too Big To Fail” should be cast aside. Failed banks should be handled, as now, by the FDIC. Bank corporations or holding companies should be allowed to fail and/or be reorganized under bankruptcy statutes. Any expectation that any banks will be “bailed out” through any other mechanism should be put to rest.

*     Congress should recognize that the biggest banks are multinational corporations. Thus, some provisions of American legislation designed to alleviate “systemic risk” should be conditioned on trans-national coordination, cooperation and sharing of burdens yet to be worked out under “Basel III.”

*     Capital reserve requirements of non-bank financial companies need to be increased, significantly, and allowable leveraging (debt/equity ratios) decreased.

*    Restore the “double liability” system that governed banks until the
FDIC was established in the 1930’s, whereby bank officers’ personal
assets would be liquidated to make depositors whole if a bank failed.

Republican Senators should stand fast against Democrats’ attempt to ram through another bad bill, so that these and other improvements can be made.

 

           PETER BEARSE, Ph.D., International Consulting Economist and Independent-Conservative Reagan Republic Candidate for Congress in NH CD 1, April 27, 2010.


[1] This adds to my response to a question on the issue raised during the first U.S. House candidates’ Forum held in NH CD 1, hosted by the Brentwood Republican Town Committee. I was the only one of the six candidates to answer the question directly and precisely.