Financial Reform or Federal Reserve Power Grab?

 

Financial Reform or Federal Reserve Power Grab? 

Another behemoth 2,000 page liberty eating monster is making its way to the President’s desk.  Like other monstrosities before it, the Dodd-Frank bill is birthed by the same blood sucking vampires in government who nearly killed the host in the housing bubbles and subsequent crashes of the CDO markets in 2008.  Chris Dodd will be exiting stage right this year, but not before he gives the people of America one more kick in the groin on the way out.  Barney Frank, whose escapades and bumbling are so well known that they need not even be discussed here has clearly and definitively proven himself not only incompetent when it comes to regulation or even basic economic understanding but also incredibly corrupt and connected to the people he is supposedly watching.  Is this what is really needed to “fix” the markets, more intervention by the very people who engineered them to the brink of total collapse? 

Fannie Mae and Freddie Mac are now the largest bailouts in U.S. history.  When people point the finger at Wall Street for risky betting they of course are right, but only to a certain degree.  The impetus for the risky betting came from all the heroin the government was injecting into the bank’s veins.  Without an inflated housing bubble and demand manipulation through all sorts of government programs such as the CRA, ECOA, Federal Reserve manipulation of interest rates (see block quote below), to the demise of the Great Society and the shift from public housing to getting low income earners in homes, collateralized debt obligations likely would have never gotten out of control.  A good portion of what was bundled in these structured debt instruments were the bad mortgages that came into existence to service the artificial demand created through government intervention vis a vie regulation.  The need to service this demand and the potential for government influenced profit and asset inflation also lead to the rise of the deceptive lending practices.  There was a whole new market of homebuyers without the traditional down payment or credit worthiness that demanded an inventive way of mortgage finance.  Since the collapse of housing in 2008, this market has all but disappeared proving the market did not need these instruments and they would not have been there without the aid of government.  With a 33% drop in home sales reported last week with the end of another interventionist program, the government has once again proven the folly of manipulation.

There are two parts of the current economic depression we are in; the “Financial Crisis” which Chris Dodd had a hand in creating and the “Housing Crisis” which one could make a strong argument was as much Barney Frank’s fault as anyone.  The Housing Crisis is basically outlined above and most people get what happened in the Housing Crisis.  You can not buy things you can’t afford or bad things will eventually happen.  The Financial Crisis in the simplest terms is that people really do not know the value of many of their investments.  The prime example being the entities which are invested in CDOs and CDSs without having any idea what they have on their books.  As always, information is paramount to investors and with the constant manipulation of the government coupled with a market that is extremely volatile, fragile and scared of public debt, this all sends incorrect information to investors.  Tack on ever changing rules such as mark-to-market accounting (to basically trick investors into thinking a company’s balance sheet is in better shape than it may be), increasing taxes on business and investment, health care uncertainty, Fed secrecy with previous bailout funds and a permanent moral hazard created by the Federal Reserve permanent bailout slush fund in this bill, this regulation will likely do as much harm as good.  With further market distortions at the hands of government, none of the essential problems of the crises can be solved.  More control and manipulation can not be the solution at the same time it is the problem.  This 2,000 pages is merely the framework of total centralized economic planning by the Federal Reserve banking cartel.  With a gutted audit as part of this package and Chris Dodd even admitting he doesn’t know how this is going to work, you can expect this 2,000 act turns into 150,000 pages of nightmares bureaucratic overhead when all the specific regulations are finally written. 

In the end, this bill doesn’t really tackle derivatives, it only forces banks that trade in the secondary markets to spin off these operations, but they can keep on betting with the house’s money behind them, administered at the privy of the Federal Reserve of course.  This bill still does not reinstitute the separation of the banking industry from private equity funds and hedge funds, so a collapse anywhere along the line still will effect lending.  The bill also seems to make it harder to sue the ratings agencies that fraudulently vouched for these toxic derivatives that are clogging up everybody’s books.  There are some small positives such as raising capital requirement the banks must keep on hand, but other than that, the law of unintended consequences surely will take over.  The bill is doomed to fail because it gives more power to the Federal Reserve and the central government to control the main aspect of the market place, picking winners – or needed and efficient uses of capital and losers –government cronies in the “too big to fails”. 

 On the Federal Reserve and Long Term Rates 

The Federal Reserve does not directly affect long term rates, but their actions with debt purchases, short term and overnight rate adjustment, general decreasing of the cost of money does affect long term rates.  There is a general agreement among economist and most financial analyst on an established relationship between short term and long term rates.  The debate is how strong the correlation is and how much influence the Fed does have on long term rates such as mortgages. 

Read more on the bill here: 

http://online.wsj.com/article/SB10001424052748704569204575329211031691230.html?mod=WSJ_newsreel_us

1 Comment

  1. FireOfLiberty

    June 29, 2010 at 1:01 am

    How anyone can think that 2000 pages of bureaucratic lawyer gibberish will not have “unintended” consequences is beyond me. When the people writing these bills, by proxy, are the same people being regulated by it – corruption is certain.

    Thanks for your analysis Andrew, as always.

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