Treasury Dept. Plan Would Give Fed Wide New Power
Bush proposes financial regulation overhaul



Questions for Debate:

1) Do you believe that the recent troubles in the financial services industry call for greater government regulation and/or oversight of that sector?
2) Is giving the Federal Reserve more power a wise solution to preventing future economic crises?
3) Are we heading towards a more centrally planned economy?

1) Do you believe that the recent troubles in the financial services industry call for greater government regulation and/or oversight of that sector?

Most definitely.

2) Is giving the Federal Reserve more power a wise solution to preventing future economic crises?

This is perhaps a misleading question (although not intentionally). The Federal Reserve (under certain reformulations) would end up with more authority, but the actual amount of oversight does not necessarily increase. Financial oversight is in the hands of four different federal agencies with competing agendas; and the situation gets even more complicated when you figure insurance transactions, as those are regulated by the States. The fact is that the current economic crisis can largely be attributed to Financial Institutions creating new forms of transactions specifically designed to circumvent the current regulatory regime; that in and of itself leaves us with one of two conclusions: regulations are obsolete and need to be disbanded, or they are insufficient and need to be expanded.

Given that the current credit market collapsed entirely on its own, I think you'd have a hard time proving that regulating the market is in and of itself less efficient than a completely unregulated market.

3) Are we heading towards a more centrally planned economy?

There is a huge difference between a planned economy and a regulated economy. Huge... in fact the difference is so large that I am surprised you could mistake the two.

I tend to agree with UJ here.

The Fed's current role is really to rein in a runaway economy and perk up a sagging economy via monetary policy. This upsets Congress and the White House, who want to see the maximum amount of growth possible. Putting the brakes on doesn't please political leaders.

During the dot-com bubble of the late 1990s, there was no regulatory counter to the runaway stock market. Even when Alan Greenspan saw that much of the run up was speculatory (as was some of the latest housing bubble) there was no mechanism in place to do anything about it other than some public statements which carried no weight.

1) Do you believe that the recent troubles in the financial services industry call for greater government regulation and/or oversight of that sector?

Yes. Consolidating the regulatory structure is more efficient as well. There is no need for several agencies regulating pieces of the financial markets. As the structures have matured, regulations should mature with them.

2) Is giving the Federal Reserve more power a wise solution to preventing future economic crises?

I think this is more of a transfer of power and a formalizing of what could be done.

3) Are we heading towards a more centrally planned economy?

Hardly. Curbing bad practices which put the unsuspecting public's money at risk is not "central planning".

At first blush it appears that consolidation and tighter controls are the way to go. But I am not confident that a government that will not even address the two worst financial disasters we face, social security and medicare, can be trusted to deal with the current crisis.

Companies that profited from risky, speculative lending shouldn't be bailed out by the gov't. They should sink or swim in the private market. This is the surest way to insure against this type of risky practice in the future.

Unfortunate as it is, this also applies to those who will lose their current houses. It will be back to rental housing for them, a place where many should have remained in the first place.

This is tough talk, HtL.

Would you prefer doing nothing, if it took us into a depression, rather than a recession?

I know the old theory. If we leave things alone long enough, we'll eventually have "two chickens in every pot."

http://www.presidentsusa.net/1928slogan.html

Because of inflation, I had to raise Herbert Hoover a chicken.

1) Do you believe that the recent troubles in the financial services industry call for greater government regulation and/or oversight of that sector?


These are tough questions, really tough, so I'll only answer one for now and perhaps only in part. I think the one area of government regulation that might be useful is in re-writing the disclosure laws for lenders offering home loans - possibly even to the point of making some sort of a "credit counselor" available to prospective borrowers to warn them about the loan sharks out there, and trust me, there's a whole bunch of them. Maybe setting up some sort of a Better Business Bureau kind of a thing for home loans would be a good idea. Have someone who really understands the scams be available for prospective home buyers to check with before they sign on the dotted line.

I'm still hearing from sub-prime lenders, just got a letter from one of them yesterday. All official looking and it's been a couple of years since I re-fied our house (with a 30 year fixed, no points, respectable lender). Anyway, they're offering a deal too good to be true, and that's because it isn't. They'll drop my payments $500/mon for the next 5 years and all I have to do is pay them 4.5 points up front which they'll just roll into the loan. Got plenty of equity, so what you say we just make the loan a nice round number like $500,000? Such a deal! Yeah, right, do the math. 4.5 points on half a million is $22,500 that they pocket up front. Add to that all those "fees" that they tack on and pretty soon your "savings" of $500 a month over 5 years pretty much goes away and you're stuck with a loan that will probably double 5 years from now, and oh, did we mention there's a pre-payment penalty? That's in sub-paragraph (F) on page 73 of the loan document. Oh, and did we mention that we'll probably sell the loan at a discount to someone else within a month and just walk away with your money?

That's how it works and near as I can tell, it's legal. Now, I don't know that I want the government to attempt to pass a law to make this sort of thing illegal, might do more harm than good with the unintended consequences, but I have no problem at all with setting up some sort of an information agency where people can go and check things out before they sign. Run public service announcements and educate people about this sort of thing. That is something the government could, and should do.

Aquilla

I understand your concerns about government meddling, but I think in this case the government should just go ahead and lay down some laws. All the public service announcements, informational pamphlets, hotlines and information agencies would only reach a portion of those that need the help. I wish it was possible to sufficiently educate every homebuyer so this kind of crisis wouldn't come up again, but that would be a tremendous overestimation of the average homebuyer.

This area simply needs regulation. Consider what mortgages have become - they are no longer relationships between you and your bank, with the bank having a direct stake in the loan it made. Now, your loan is sold and repackaged as a piece of a security. All of that home equity that was sitting around all over America, usually untouched and pretty safe, kept between you and your bank, has now been tapped into by the Wall Street bunch, and it has moved largely outside of bank regulation. The Wall Street guys are not nearly as picky about what kinds of loans they are buying. I read in Time that piles of these subprime loans are subdivided into different grades, and a portion of them get AAA ratings - even though they are still subprime loans. I just find it incredible that a 5-year time financial time bomb could somehow get such an investment rating, making it look like a low-risk option. That is what happens when you let Wall Street police itself.

The interesting part about this whole debate is how little responsibility the folks that caused this mess- the bankers- have to pay for thier actions- basically- not a darned thing- they lose nothing. In fact, it took a "no compete clause" to Keep a Bear-sterns exec from going to Jp Morgan- heck, he was even offered a job by the folks that were doing the bailing out with the feds!

What we need to do is make the folks that make the decisions that cause massive failure economically responsible- allow every homeowner in America to sue them, or every investor to sue them- and allow them no bankruptcy protections- literally auction off the clothes on thier backs.

It is just so silly that we keep enabling those that least deserve or even NEED it, but, as Aquilla's post shows- give most of our scorn and lay most of the responsibility at the homeowners feet.

Why not at least make the bankers and speculators lose a bit more than the investors and homeowners?

1) Do you believe that the recent troubles in the financial services industry call for greater government regulation and/or oversight of that sector?
I'm not sure I see a significantly greater amount of regulation here. I think the Fed is doing some house cleaning and making some decisions (such as oversight of hedge funds & mortgage practices) that are probably long overdue.

Our financial history has proven time and time again that some level of oversight is needed for financial institutions. Deregulation inevitably leads to abuses and the people are usually the ones caught in the middle (Enron employees come to mind, many of whom are good friends of mine).

The topic isn't without merit, I always get nervous when the government does anything resembling a power grab, which this is most assuredly going to be viewed as. But I feel this is a correction that is long overdue.

2) Is giving the Federal Reserve more power a wise solution to preventing future economic crises?
It can be, yes. I do feel there should be a distinction between allowing people to still feel the consequences for poor decisions vs. protecting people from dumb decisions (Aquilla gave a great example of this as it relates to sub-prime mortgages, imo).

Caveat emptor should still rule the day, but some oversight in some of the more financially shady areas of the economy is long overdue. Consumer education, as Aquilla alluded to, should probably be a priority as well.

3) Are we heading towards a more centrally planned economy?
I think this is a bit alarmist. And too general to be answered with any valued specificity. Suffice to say I do not believe we are headed to a centrally planned economy.

1) No, or at least not yet. I am not sure we are really aware of what has happened to us so as to enact new regs and create new agencies, or redefine existing ones. Smells like tough facts making bad law.

A one shot deal like Bear Stearns is one thing; changing the entire landscape is another. Basically, banks provide insured deposits. Other types of investments are not insured. If you want greater return, you take greater risk. The stock market kills a bank CD in returns over hte long term,, but the market can lose money--CDs, in theory, cannot. If you go for greater returns, you get greater risk. The govt cannot insure everthing.

As far as mortgages go, a one time solution is cleary available--roll down interest rates to their initial levels on mortgage notes less than 5 years old but with 15 or more year terms, and keep them fixed for five years from today. Then, let them adjust per contract. That should get us over the hump and into a new era when they can be refinanced. Any lost income on CMBS issued from pools of these mortgages could be guaranteed by the Feds--again, a one time shot.

2) The Fed is owned by member banks, and is not a govt agency. Are they planning to change the ownership of the Fed? This is really strange. I could think of many more logical ways to regulate the fin markets--if we really need more regs and agencies.

3) Sounds like it.