Real Solutions for Financial Reform

Doug Holtz-Eakin, economist and former Director of the Congressional Budget Office, shares his thoughts on banking reform.

Real solutions for real problems

The biggest threat to regulatory reform is always the lobbying of the financial services sectors to preserve their status. This time, Congress must rise above the lobbying scrum and deal with three big problems.

First, it must create a firm commitment to a bankruptcy procedure. Using a panel of bankruptcy judges to trigger resolution would be best.

If the Treasury Department, the FDIC or a systemic-risk council decides that traditional bankruptcy could be too disruptive, it should trigger a “speed bankruptcy” — in which equity holders are wiped out and debt is swapped for equity so bondholders become the new owners.

Second, provide consumer protection by building on the experience of the Federal Trade Commission. It has a specialized staff of lawyers and economists who understand the complex nature of credit products. Congress should augment FTC resources and emphasize investigation of true cases of fraudulent and deceptive practices.

Third, deal with the housing government-sponsored enterprises. The goal should be steadily to reduce the dependence of the mortgage market on the federal government.

Congress should slim down Fannie Mae and Freddie Mac’s role by removing their affordable housing mission, unwinding the retained portfolios and toughening the regulatory oversight of their guarantee and securitization lines.

I like the way this guy thinks. Now it's up to Congress to pass it, without getting caught up in partisan bickering. I'm not holding my breath.

Financial Reform

The latest plan out of the Senate Banking Commitee includes a $50 billion bailout fund to handle failed banks. Chris Dodd claims the fund will be used to liquidate bank assets in the event of a failure.

Critics of the plan believe the bankruptcy and the market are more than enough to handle a bank liquidation.

“There is no reason why a bank holding company cannot be dealt with in bankruptcy except that it inconveniences politicians,” Mr. Whalen said.

Bondholders would actually fare better under normal bankruptcy than under the Dodd bill, he said, adding: “Until the U.S. government stops behaving like a bunch of European technocrats and ends the idea of a public bailout for any bank, the cancer of ‘too big to fail’ and, behind it, political corruption and the corporate state, will grow.”

Until we let banks face the consequences of their bad decisions, they will continue to use the federal government, and by extension the American taxpayer, as their de facto insurance company.