As congress grapples with the question of how to overhaul the nation’s financial regulations, several experts say that the legislation does not even address the right problems according to a report this week in The New York Times. Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market including the future of the housing finance companies Fannie Mae and Freddie Mac.
Other critics warn that the proposed legislation would insert the government acutely into the financial markets, creating new distortions and seeding future crises. They say the focus of financial reform should instead be on increased transparency.
Republicans, in general, will argue that it is premature to pass such significant legislation while so much about the crisis remains unclear and so many inquiries are in progress. Meanwhile Republicans did abandon their blockade against the legislation and hope they can change the bill on the Senate floor particularly the consumer-protection provisions.
The Senate Democrats’ bill would create a Consumer Financial Protection Bureau within the Federal Reserve that would have the power to police transactions between lending and investment banking institutions that provide financial services to customers. Republicans say the bill would have unintended consequences that could ensnare small business people for merely extending credit to their customers.
The bill would establish a nine-member Financial Services Oversight Council, including the treasury secretary, Federal Reserve chair and the heads of regulatory agencies to monitor markets for threats, such as sub-prime mortgages and mortgage-backed securities that preceded the financial near-collapse two years ago.
The Federal Reserve would begin policing large bank holding companies and interconnected nonbank institutions whose collapse might pose a threat to the economy. With approval of the council, the Fed could even break up complex companies that posed a grave threat. And it seeks to ensure that troubled companies, however large, can be liquidated at no cost to taxpayers. Even without approved legislation the government plans to require lenders to hold larger reserves against unexpected losses and to require that they keep money on hand to meet short-term needs.
Most investment derivatives — such as the hundreds of billions of dollars in complex instruments blamed for accelerating the crisis two years ago — would have to be traded on regulated exchanges.
Even Democrats agree that significant issues remain to be addressed. But they say that the government must press forward in responding to the problems that already are clear.
At a time when senior executives of Wall Street giant Goldman Sachs were denounced by lawmakers from both parties popular opinion is clearly on the side of those wanting major changes in financial regulations. A real bipartisan debate should occur on this bill and palpable improvements should be made that would protect the public’s financial interests. PHA