Bipartisan support for financial reform looked likely up until now. Though two camps had emerged prior to the introduction of a bill, they had been, for the most part, based on the issue rather than the party. However, with legislation looming Democrats and Republicans have split at the seam (hard to say we didn’t see this coming). With President Obama leading the way, Senate Democrats are pushing their bill with no rewrite necessary. Expecting that a few key Republican senators, particularly those up for reelection, will support the bill, Democrats are much less inclined to change this bill than the healthcare reform passed last month. While the GOP rallies around senator McConnell, both parties agree that overheated rhetoric will only hurt policy.

Effectively the bill would give the FED the right to monitor the nation’s largest banks, those with assets over $50 billion. Then, if any institution were deemed instable the law would provide the Treasury Secretary with the authority to take over and effectively shut the company down. The overall goal, voiced by both Obama and Geithner, is to avoid any more taxpayer bailouts of financial institutions.

As legislation approaches, White house press secretary Gibbs adds that Obama “could not accept bad policy in pursuit of bipartisanship.” It is about time that the President has favored policy over politics. Though it would be great if everyone in Congress could work together, it is clear that in this particular case political clout is trying to overshadow lawmaking. Something needs to be done to prevent future collapses and if partisanship gets in the way of this bill then it could be years before another solution appears.

Fluctuations in Banking Regulations

Throughout the economic history of the United States, government regulation has declined during times of prosperity and increased in times of national crisis. During periods of economic prosperity, banking regulation receives little to no attention as the focus is placed instead upon securing individual prosperity. In an article concerning trends in banking regulation, David Leonhart discusses the repercussions of fluctuating bank regulations. He writes the following:

By definition, the next period of financial excess will appear to have recent history on its side. Asset prices will have been rising, and whatever new financial instrument that comes along will look as if it is safe. "When things are going well," Paul A. Volcker, the former Fed chairman, says, "it's very hard to conduct a disciplined regulation, because everyone's against you." Sure enough, both Bernanke and Geithner, along with dozens of other regulators, overlooked many signs of excess over the past decade.

The article strives to convey the importance of keeping banking regulation a priority in both times of prosperity and crisis. It is necessary that a perpetual state of regulation be enacted to protect individuals from fiscal losses incurred by corporate misjudgment. Additionally, the U.S. government will be saved the costs of repairing financial meltdowns if a standard yet flexible bank regulation be put in place.

The argument for increased banking regulation is supported by the comments of Arnold King regarding Leonhart’s article. King writes about the essentiality of time consistency in banking regulations. Simply because times are good, King points out, does not justify lax regulations. Rather, the solution lies in “making credible commitments not to bail out failed banks” and “that you need to make credible commitments to keep rules in place when times are good”. In employing these precautions and standards, a commitment to today’s regulatory regime will remain intact.

For further reference and to view the article, please visit the Library of Economics and Liberty website at:

(http://econlog.econlib.org/archives/2010/03/time_consistenc_1.html)

Senator Dodd's Regulation Proposal

Last week Connecticut Senator Christopher J. Dodd (Dem.) proposed a new plan for rectifying financial regulation. The proposal calls for the creation of a Bureau of Financial Protection which would modify the Consumer Financial Protection Agency supported by the House last December. If accepted the bureau will be responsible for regulating and preventing mortgage, credit union and payday loan deception amongst other financial issues which violate consumer safety. Senator Dodd recommends the following be implemented:

• the creation of the bureau within the national Treasury Department


• an independent director whom the president appoints


• a budget derived from fees obtained from large banks and other lenders


• obligatory discourse between existing bank and credit union regulators to ensure new rules are agreeable to all parties involved

The proposal is contested by big bank lobbyists and consumer advocates regardless of political alliance. Those in favor of big banks argue that the proposal will allow for an unnecessary increase in government control of financial industries and will impose upon existing regulators whom already ensure consumer safety. On the other hand, consumer advocates oppose the plan because it will only allow for regulation of banks and credit unions which maintain gross assets rather than all financial institutions. Additionally, requiring discussion with existing regulators, those deemed responsible by some for the financial crisis, limits the independence of the bureau to create new rules beneficial to the public.

Proposals introducing new policies which affect financial regulation will continue to elicit controversy. Government officials must consider the interests of lobbyists but ought not place them above the needs and protection of the consumers. It is time for the government to settle upon a financial regulation reform plan which benefits the American public not private interests.

For further information please see the attached New York Times article:

http://www.nytimes.com/2010/03/01/business/economy/01regulate.html?pagewanted=1

Overseeing Banks: Who Does It?

With the economy slowly limping back towards the positive, government action is starting to take place. Pushed along by President Obama, Congress finally has banking regulation bills on the floor. Though the House has already passed a primary bill, debate in the Senate continues over who should be in charge of overseeing the banking industry. Their are currently two choices, the Fed (Federal Reserve Bank), and the Treasury Department. Neither party has solidified which side it supports with both Democrats and Republicans supporting each "candidate."

The House bill provides for continued Fed power, however it is likely the the Senate decision will strip the Fed of some of its responsibilities, bequeathing them to the Treasury Department. The most important is financial regulation. Mr. Bernanke (head of the Reserve) said earlier this month that he would support a Treasury-lead council, however only in regards to risk management.

Whether or not the Fed should lose control of some regulation is still up for debate. What is clear, is that Congress will soon pass a bill creating a committee to watch over financial institutions in an effort to prevent another economic collapse. Hopefully this committee will mark a meeting of the Fed and the Treasury, and that a coalition of these agencies will promote a more watchful guardian over the big national banks.

Manipulation in Merrill Lynch Bailout

This past week New York state officials filed a lawsuit against Bank of America executives regarding the Merrill Lynch bailout. The bailout occurred in January 2009. Bank of America was allotted $45 billion in government funds after merging with Merrill Lynch. Merrill Lynch used money from the original bank bailout funds to pay executive bonuses knowing that the institution had sustained fiscal losses during that year. Despite this, Bank of America merged with Merrill Lynch and used their extra government funding to cover the losses incurrred due to payment of the bonuses.

In order to prevent further misuse of government funding the federal government needs to better allocate and oversee the distribution of bailout money. This would entail conducting more in depth inquiries regarding payments of bonuses to bank executives, monitoring how the bailout money is spent by banks, and restricting the use of funds. Fiscal transactions should be made more transparent as well. The public is now aware of the current scandal due largely to the media coverage of the filed lawsuit. Citizens, however, deserve protection against such manipulation of monetary funding which can be achieved through pre-emptive government regulation.

Please see the attached BBC article for further information regarding the Bank of America and Merrill Lynch lawsuit:

http://news.bbc.co.uk/2/hi/business/8499281.stm