Financial 'Reform': Sen. Chris Dodd's proposed overhaul would replace the Federal Reserve with a "super regulator" to oversee the banking and financial industries. Will it work? Consider the source.
Along with fellow Democrat Barney Frank, now chairman of the House Financial Services Committee, Dodd, who heads the Senate Banking Committee, has done as much to damage this nation's financial system as anyone and that includes all the CEOs and subprime scoundrels as well as former Fed chief Alan Greenspan, whom many blame for lax oversight and too-loose credit in the run-up to the meltdown.
What did Dodd do? In recent decades, he and his fellow Democrats created a system of perverse incentives by unleashing the Community Reinvestment Act to force banks to make bad loans, then encouraging Fannie Mae and Freddie Mac to finance the scheme with taxpayer-guaranteed borrowing.
It led to Fannie and Freddie virtually taking over the mortgage industry. It also led to the financial meltdown that began in 2007, from which we're still trying to escape. Now Dodd wants to "fix" what he and his pals broke.
In particular, Dodd's bill would shrink the duties of the Fed. As the Washington Post put it, his plan "would impose the most fundamental change in the Fed's mission since the Great Depression, leaving it responsible for little besides setting monetary policy."
For those who ask "so what?" let's start with the obvious: The Fed did not create the financial crisis, though it's possible that holding interest rates at a 40-year low for nearly a year in 2003 and 2004 contributed to its severity. No, our system melted down because the banks did what they were told by Dodd and others in Congress: lend money, even when it was financially unwise to do so.
Dodd and other believers in government's omnipotence think regulators can know at all times what's going on in the economy and control it. They can't. The economy is far too complex and the temptations to corruption and greed far too great.
As economist Don Boudreaux wrote: "These unavoidable realities of the human condition will result in the One Big Regulator ... injecting into financial markets systematic risks far greater than those that already exist."
Dead on. It will, in short, be worse than what we currently have.
By handing off the Fed's risk-management, consumer-protection and bank-regulation responsibilities to a new super agency, we wouldn't just be shuffling responsibilities we'd also be fostering the dangerous delusion that all our economic ills require massive new bureaucracies to cure them.
Why would Dodd & Co. do this? One reason might be that the Fed by law is highly independent. So the senator and others in Congress can't tell it what to do, or even threaten it through the budget. This builds resentment in Congress. And as we all know, Congress is all about control. Having once ruined our financial system, they now seek even more control.
The Fed isn't perfect, but it is independent. And a number of studies in recent years have shown that central banks around the world do a better job when they're free of direct political pressure.
We may take issue with the Fed's role in bank bailouts, or its conduct of interest-rate policy, but we don't think those would be corrected by having a super regulator in charge. Quite the contrary.
Perhaps Dodd expects us to forget his role in the 2007-09 financial fiasco how he was part of Congress' oversight of the banking system as he and others in the legislative branch accepted sweetheart loans from the very banks they were supposed to oversee.
Well, we haven't. Such incompetence and venality cost us trillions of dollars in bailouts, phony stimulus and TARP funding. Our financial system doesn't need more oversight of this sort.