Banking 'Reform'

The Obama administration's idea of reform isn't about modification or improvement, but transformation. And now that health care has been reformed, next on the list is reform of the financial industry. 

The House passed its financial reform bill in December by a vote of 223 to 202. Now the Senate Banking Committee, led by Chris Dodd (D-CT), has a 1,300-page bill ready to go to the floor. This administration's agenda on financial reform seems based on the assertion that "we can't let something as critical as the economy be run by the private sector." Tweaks do need to be made, but it's clear that through this legislation, the administration moves closer -- once again -- to the transformation of another private sector industry. They seek nothing less than Wall Street's move to Washington.   

Painful as it is, a free-market capitalist economy is going to ebb and flow. But big government has aggravated the severity of our current financial meltdown as well as contributed to the stymied recovery -- similar to what happened in the New Deal of the 1930s. This administration is following suit, and their financial reform legislation will stymie or derail a robust recovery. And thanks again to the mainstream media and Michael Moore types, the polls show that the public is ready to rip into those evil Wall Street profiteering capitalists. 

Here is an example of how the government has failed in the past to manage that which they seek to control in the future. Freddie Mac and Fannie Mae are the largest home lenders in America. They were created as a private funding vehicle for homeownership with a government guarantee that Uncle Sam would bail them out if they ever got in trouble. So Americans poured their money into Freddie and Fannie in return for a decent investment yield and the security of being backed up by the safety and soundness of the U.S. government. 

All went well until politics got into the action, stipulating that affordable homeownership must be made accessible to everyone. To accomplish this, Freddie and Fannie (with Uncle Sam's full endorsement) extended loan approval to basically anybody with a heartbeat. (I'm being facetious, but not by much). Never mind that the margins were so narrow -- or even upside-down -- that any little hiccup would bring the house of cards tumbling down. Loan policy 101 says that any lender who does not require the borrower to have skin in the game (equity) will, over time, have his head handed to him on a platter. Well, well. Freddie and Fannie did just that, and Uncle Sam is on the hook, lock, stock, and barrel. 

The previous administration sent up frequent red flags saying Freddie and Fannie needed to be overhauled because they were engaged in the very risky business of sub-prime lending. But those warnings were ridiculed by the likes of Representative Barney Frank (D-MA), currently serving as the chair of the Financial Services Committee, who said in 2003,

... these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in the terms of affordable housing.   

Again, the Democrats are great at championing the philosophy that the end justifies the means, regardless of the price paid by the U.S. taxpayer or the consequences to the economy.  And now they think that they should have more control over private banking?

Speaking of price, I wonder what the price of loyalty is in the case of Senate Banking Chair Chris Dodd and former Senator Barack Obama (D-IL), who topped the list with $165k and $126k in campaign contributions respectively from Freddie and Fannie over the last ten years. In the real world, this type of activity would be a huge conflict of interest, a scenario ripe for prosecution. But the real world and Washington operate under a different protocol when it comes to politics.

As co-signer for Freddie and Fannie, Uncle Sam should have known better than to allow this kind of lender incompetence. Yet the government's record on bankrupting Medicare, Medicaid, and Social Security does not give it much creditability on anything fiscal. And just as both of these social government programs are broke, so are Freddie and Fannie. Uncle Sam has bailed them out to the tune of $127 billion so far, which is more than any of the net private-sector banking bail-outs combined. The $127 billion investment to date is just the beginning. There remain valid concerns about near-term shortfalls for the mortgage giants. 

Nothing could damage capitalism more severely than a nationalized financial system. Yet we move forward allowing those with a dismal track record on reforming anything to transform our entire health care industry into what will be a single-payer system. The single-payer system has failed everywhere in the world it has been tried. So even before we see the negative results of health care reform (it's not going to be fully implemented until 2014), we will allow Washington to enact legislation which will move our financial institutions one step closer to opening an Obamabank branch on a corner near you. 
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