The NEXT Obamacare -- Financial Regulatory Reform

As awful as the new Obamacare law is, perhaps the worst news is that Nancy Pelosi and Harry Reid aren't done yet; they have until January 3 to keep making new, terrible laws. Many Americans are still focused on healthcare, and that is good—we need to direct that outrage both to the elections and at efforts to repeal it. However, we can't forget about the work that needs to be done in preventing more bad policy from being enacted before a new Congress can take office and clean up the mess.

Perhaps the most terrible idea being pushed is a "financial regulatory reform" that would not only give the government even more control of banks, but would also contain a permanent bailout authority. The bill being debated in the Senate right now would give the government another $50 billion to spend for new bailouts whenever it sees fit, i.e. whenever politically-connected interests like the unions or President Obama's political allies come calling for it.

There's a lot more in the bill -- a thousand pages more. Essentially, liberals in Congress, with President Obama's support, think that if you get a few more DMV-quality bureaucrats setting policy for the big banks, that suddenly the financial markets will operate smoothly and efficiently with no more crashes, ever.

That's ludicrous. The financial crisis happened for a number of reasons, but two of the biggest are the fault of too much government, not too little.

1) The housing bubble collapsed. In recent years, a favorite pastime of politicians was cheerleading overly-generous lending standards to people who wanted to buy more house than they could afford. This wasn't the market at work, but the distortions of government-sponsored enterprises like Fannie Mae and Freddie Mac, which exacerbated the moral hazard of the housing markets to an incalculable degree. Specifically, Fannie and Freddie were Ground Zero for the subprime lending crisis, exhibit A of the "troubled assets" that were the basis for the original $700 billion bailout bill passed in October 2008. Fannie and Freddie should be privatized immediately, instead of being insulated from rational supply and demand. To date, Congress hasn't acted.

2) Tax increases were made almost inevitable by the November 2006 congressional elections. Taxes were one issue where Republicans maintained an edge on Democrats, but fatigue from the Iraq war and disgust at congressional excesses (including overspending) carried the day. Financial markets, which actually started their downturn in 2007, realized that control of Congress by far-left politicians like Nancy Pelosi and Harry Reid meant that the 2001 and 2003 Bush tax cuts were likely to expire at the end of 2010. Now that 2010 has arrived, we have a chance to extend or make permanent some of those tax cuts, but President Obama and his allies in Congress want as much of them as possible to expire, which would amount to a $2 trillion mugging of taxpayers.

Liberals argue that the real culprit was the Gramm-Leach-Bliley legislation passed in 1999 and signed into law by then-President Bill Clinton. This law repealed the New Deal-era Glass-Steagall Act, which had banned a given company from dabbling in any combination of investment banking, commercial banking, and insurance. Liberals, who fundamentally distrust a free-wheeling, open economy, are naturally suspicious of financial deregulation.

However, a government mandate that a department store not be allowed to sell both T-shirts and rubber ducks would be laughed at—T-shirts and rubber ducks are simply commodities to be sold, and it should be up to a businessman what he sells in his store. It's the same with securities and insurance, regardless of their higher dollar value. Liberals think they can scare Americans by emphasizing the complicated nature of these different financial products, but we shouldn't let them.

The most important thing to understand is that taxpayers should not be forced to bail out businesses—when we do this, not only are we usually just postponing the inevitable, but we're ratifying the failed business models of those businesses. This is a very important point: though it sounds heartless to allow a company to fail and potentially for its workers to lose their jobs, if we prop up failing companies, it devalues the companies that have successful models, making it harder for them to establish their deserved dominance in that given industry which can, in turn, allow them to hire more workers, including the ones laid off by the failed company.

One final point. The financial markets already have massive, overlapping and burdensome regulations they have to navigate from the Treasury Department (which has controlled the bailout money), the Securities and Exchange Commission (which enforces reporting requirements), the Federal Reserve (which sets interest rates and has also bailed out companies), the Commodity Futures Trading Commission (which regulates other financial products known as derivatives), and other members of the Washington, D.C. alphabet soup brigade. It's a ridiculous myth that Wall Street is unregulated, and in fact many Wall Street executives give heavily to liberal politicians.

Let's not add to this mess with another layer of regulations. Call your Senators TODAY and tell them that you don't want more government meddling in the financial sector.

Andrew Langer is President of the Institute for Liberty.

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