The United States was built on a strong entrepreneurial foundation of risk taking and freedom to pursue one’s dreams and interests.
Unfortunately, the Obama administration’s belief in the strong role of a centralized federal government to regulate all aspects of our lives is presenting serious challenges to that foundation for success.
The latest assault on our lives is from retiring US Senator Christopher Dodd’s effort to turn our financial sector into an industry in which the government sets the rules for what products can be offered, how they can be sold, determines how financial industry employees can be paid, and limits hedging efforts by firms to balance their investment risks.
Don’t get me wrong. I find the Wild West nature of today’s financial industry and the current framework in which those firms operate to be unhealthy for the well being of our country. The 2008 collapse of many leading financial firms and the hundreds of billions of tax payer money needed to keep the financial system liquid and operating should never have happened.
Part of the problem goes back to 1999 when President Bill Clinton signed into law the Financial Services Modernization Act which repealed part of the Glass-Stegall Act of 1933 which had kept investment firm and insurance company businesses separate from commercial bank operations. In essence, our checking and savings account monies were not to be put at risk by possible losses by a firm’s investment operations.
Clinton’s former Treasury Secretary, Robert Rubin, who came to the Clinton administration from Goldman Sachs, lobbied hard for the law’s passage since he was angling to be the head of Citigroup which wanted to own all types of financial firms under one roof.
And with the stroke of Clinton’s pen, our savings and checking accounts were again at risk of being wiped out by failure of a financial conglomerate’s non-banking operation. But, of course, those financial conglomerates knew that the FDIC would come to the rescue of the traditional account depositors. I am sure those financial conglomerates never dreamed the government would completely bail them out of all of their losses, or coordinate their sales to other firms, which partly came true for many in 2008 after their wrong bets on risky mortgages. Or that the government would end up buying and rescuing AIG which had insured many of those risky mortgage products sold by those financial conglomerates.
Today’s financial reform proposals focus on making sure investors are fully aware of the risky derivatives market such as those mortgage backed securities and collateralized debt obligations. And by making sure the agencies which rate those investments do not have any conflicts of interest by profiting from other products offered by the financial conglomerates who offer those investments. And by possibly setting up a multi-billion dollar government fund which would be ready to rescue those firms during future collapses.
I believe failure is good for a capitalist society whether it is for an individual investor who did not do their due diligence or whether it is from a large investment house which bet its money on the wrong side of the market. I am not in favor of the current reform proposals which would also put the federal government in charge of reviewing even the smallest financial transactions such as those created to fund small businesses including funding mechanisms from so-called angel investors.
Instead, I would favor a new Glass-Stegall type law which would again separate investment firm operations from the traditional banking operations which typically fund our mortgages, small business loans, and other working capital needs. If an investment house – and its clients – make bad market bets, let them fail but do not let their fall take down banking subsidiaries which will require FDIC rescue.
And I would also take a look at reforming the Community Reinvestment Act of 1977 signed by President Carter which “encouraged” banks to make loans to questionable borrowers in low-to-middle income neighborhoods. Those types of loans are partly to blame for the failure of Fannie Mae and Freddie Mac which are two quasi-governmental entities created by President Roosevelt to buy loans from banks so the banks would have more money to loan to others. When the housing market crashed during the 2008 financial meltdown, it was those questionable loans which provided fuel to that fire.
