Fight for financial reform

No one is really happy with the state of finance.

Liberals who were optimistic that the economic crisis would move the country in a more progressive direction, and Tea Party activists who fear the state is going too far, both seem to agree that bailing out America’s biggest financial institutions was a mistake.

The left hated the bailouts because they thought it let rich bankers get off easily while the American people suffered.

The right saw it as a reward for failure that will encourage firms to make the same mistakes again.

Everyone in between hates the bailouts, too.

In truth, injecting key financial firms with government cash was necessary and was rightfully supported by former Republican President George W. Bush and current Democratic President Barack Obama.

But it is true that the current bailouts create incentives for big banks to fail again and that it is unfair for such large institutions to receive such generous support from taxpayers without giving anything in return.

Numerous huge financial firms cannot all be allowed to fail at once, so in order to avoid a repeat of the “too big to fail” mess, we need updated financial rules.

After a huge (and improbable) health care victory, this should be Obama’s focus.

Deregulation gets a lot of blame for the current financial crisis.

Some aspects of this trend — like bringing down the wall between commercial and investment banks during the years of President Bill Clinton — might have made the crisis worse.

But blame for this recession lies with a lot of institutions that weren’t banks and whose behavior wasn’t really regulated at all.

Simply bringing back the old rules won’t stop another crisis like this one.

There are similar myths in conservative circles.

Some argue that this crisis was primarily caused by bad regulation — namely the Community Reinvestment Act — which encouraged banks to make loans to those who could not afford them.

Two government-sponsored entities, Fannie Mae and Freddie Mac, bought a lot of these bad loans, but so did private financial firms.

Financial reform legislation has made it through the House of Representatives and the Senate Banking Committee. In both cases, the bills got no Republican votes.

Conservative objections mostly relate to a proposed new consumer protection agency — a new organization that would have the authority to write and enforce rules protecting consumers from bank practices deemed abusive.

Whatever happens to that controversial organization, it is important that Congress pass financial reform that regulates all financial organizations and puts in place stricter requirements on how much reserves they need to maintain.

Fortunately, the Senate version of the bill would do just that. It would set up a special group of regulators that would ensure any important financial company is regulated by the Federal Reserve and would set up a process for liquidating troubled firms.

Creating tougher reserve requirements is especially important because regulation tends to be lax in boom times.

We need some tough new rules that can be followed consistently.
 

E-mail: nrdixon@indiana.edu