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Financial reform plan misses the mark

Marketplace Staff Jun 24, 2009
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Financial reform plan misses the mark

Marketplace Staff Jun 24, 2009
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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.

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