Financial reform plan misses the mark
The Obama administration wants to create a super-regulator and is calling for an independent financial products agency to regulate the financial system. Commentator David Frum says these reforms fail to get at the root of the problem.
David Frum (David Frum)
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TEXT OF COMMENTARY
Kai Ryssdal: Courtesy of House Financial Services committee chairman Barney Frank, we now have at least a tentative timetable for how Congress will take up reforming the financial industry. Frank said today his committee will start looking at President Obama's plan about the middle of next month. Not that it's going to go quickly. Frank said there will probably as many as six bills crammed together into one huge vote on the House floor. Commentator David Frum says no matter how many bills there are, the proposed changes to how Wall Street does business miss the point.
DAVID FRUM: The Obama administration's financial reform plans do not even begin to address the causes of today's financial crisis: an over supply and over demand for bad housing loans.
Here's how we created the oversupply: In the 1990s and 2000s, the Clinton and then the George W. Bush administration promoted home ownership by urging banks to relax lending standards. Plus, the tax code incentivized home speculation by allowing home sellers to pocket up to $500,000 in capital gains tax free and repeat every two years.
As for the over demand: In the early 2000s, banks adopted new loan safety guidelines. These guidelines, called Basel II after the Swiss city in which they were negotiated, deemed owner-occupied mortgages a super-safe investment. Banks that bought mortgages, as opposed to say corporate debt, could use much more of their own money, keep lower reserves, and earn higher returns.
The Obama administration is not advocating the reversal of Basel II. It's not ending the tax break for house flipping. It's not tightening mortgage lending standards.
What it is doing instead is assigning more powers to the Federal Reserve. The theory is that in future the Fed will prick asset price bubbles when they pose "systemic risk." Fat chance.
Central bankers rarely prick asset bubbles, because they rarely recognize them until it's too late. Popping them at that point becomes too scary and too dangerous.
It is, as John Kenneth Galbraith once said, like committing suicide out of fear of death.
Yet by expanding government regulatory power, the Obama administration may invite innovation-thwarting meddling. Back in the 1990s, entrepreneurs used to say that America was the only country on earth where you could borrow $100 million without owning a suit. That's the thing we need to defend. What we need to end is the ability to borrow $100,000 without a down payment.
RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.
Comments
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From NH, 06/25/2009
Frun does not represent basel II very well. He seems to be misrepresenting it as something that should be cancelled,In fact, it hasnt even been fully implemented yet, and has far broader implications than deeming owner operated mortgages " a super safe investment".
As I understand it, Basel II, which is still in multi-year implementation stages in the US, will provide international regulatory minimal requirements for bank's capitol reserves based on three types of bank risk factors, being credit risk, operational risk and market risk.
Basel II will bring needed international risk/capitol reserve standards, supervisory review, and enhanced disclosure of bank risks.... i.e. better transparency. And Frum seems to be suggesting it is otherwise. Why?
The large banks, with their over leveraging, off-book balance sheet liabilities, rotten derivatives instruments, etc... need to comply with basel II. I would guess they are against it as it's full implementation approaches.
Get better founded commentators, please. And not industry shills.
From fergus falls, MN, 06/25/2009
Mr David frum
Why Do you ignore the fact that this exact same real estate bubble occured under Reagen and Daddy Bush.
lincoln savings in loan failed in 1986 exactly the same way Indy mac failed in 2006-2007
The only difference between 1986 and 2006 bailout was fdic bailed out the savings in loans without needing to inform us the people
Why do People ignore the fact that this is the second time trikle down has caused a housing bubble and then a burst and a recession
Oh ya I know the repubs will quote their fuzzy math that a recession did not occur in the 80's
EXCUSE ME I LIVED IN CALIFORNIA IN THE 80's I saw the results of the bubble bursting..FIRST HAND
From San Antonio, TX, 06/25/2009
Seriously, Kai. Do you mean us to believe that you could not find a better informed opinion on Obama's regulatory plan and the Federal Reserve than David "Axis of Hatred" Frum? With the myriad professional economists out there, why on earth would you choose a professional bloviator like Frum? Writing economic speeches for George W. Bush is more like disqualification than qualification to have a credible opinion. You might have picked Brad DeLong, James K. Galbraith (who knows John K. much better than Frum) or several others, and had much more sensible commentary. Please do better.
From Emeryville, CA, 06/24/2009
Oops. Starring David Frum in the lead role..........
Hearing David Frum quote JK Galbraith disordered my wits
From Emeryville, CA, 06/24/2009
IF YOU ONLY SEE ONE MOVIE THIS YEAR, SEE..........
THE LAST TEMPTATION OF MARKETPLACE LISTENERS TO ABANDON 'CIVILITY'
Starring DAVID FRUM in the title role as SIMON LAGREE
(the rest of the project is in development until the producers do a few more lunches)
Seriously, entrepreneurs should be able to borrow millions on faith while 'the little people' need 20% down? Eu.
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