As the Nation enters the “political season” with the next presidential election a mere year away, politicos, pundits and White House contenders have questioned whether the financial reform measure is an appropriate regulatory response to the financial tsunami. They also question the wisdom of its overall mandate to provide proactive corrective measures for firms that are deemed to be “too big to fail” as many market observers continue to ask if the measure will remedy the lingering economic damage from the financial crisis.
How Big is Too Big to Fail?
While the minutia of the regulatory matters is not the purview of water cooler discussion, there is a need for a regulatory paradigm that lends a “quiet hand” in keeping the financial sector on the right track.
The Dodd-Frank Act is designed to remediate specific problems that contributed to the financial meltdown of 2008 and the rules written so far may lead to significant changes in bank structures. Corporate governance, risk management and internal controls procedures of financial firms are redesigned to ensure compliance with the new regulatory scheme and a mechanism set up to unwind firms that are deemed to be systemically important without disrupting the broader capital markets here and overseas.
But there is a growing narrative that the measure misses the mark in understanding the government’s heavy hand in the financial crisis because the final rules and regulations currently hitting the street ignore the Fed’s role in abetting the crisis while opening the door to future transfers from taxpayers to banks by way of another inevitable round of bailouts.
For instance, a recent Op-Ed by Jon Huntsman (R-UT) in the Wall Street Journal opines that the federal government made the “Great Recession” worse by ginning up the housing finance market through Fannie Mae and Freddie Mac and in so doing created a real-estate asset bubble that was fueled by the easy money policy of former Federal Reserve chairman Alan Greenspan.
Of course this could be the case of a candidate adopting a policy position that is already a matter of accepted, if not conventional wisdom. For those not yet focused on next year’s run for the roses, Mr. Huntsman is a onetime governor of Utah and former ambassador to China and Singapore, now seeking the Republican presidential nomination.
Trouble on Main Street
That being said it would also be a political miscalculation at best to publicly say that the trouble actually began down on Main Street where John and Jane Q. Public obtained loans that they were not in a position to pay back along with so-called liar loans acquired by speculators, flippers and fraudsters that infiltrated the system and which ultimately culminated with blowing out the credit default swaps market.
The candidate from Utah is correct to point out that three years after the crisis and bailout maneuvers pursued by the Federal Reserve and Treasury Department, big financial firms have only gotten bigger and still have a firm comparative advantage in borrowing over their competitors, a “subsidy” if you will that equates to about one-half of a percentage point, says Mr. Huntsman.
Meanwhile the debate rolls on as some “experts” argue that businesses would benefit if their lenders faced fewer regulatory hurdles and the best remedy is to eliminate Dodd-Frank provisions set out to remediate failing firms on the taxpayers’ dole. But the overarching issue of how big is too big to fail applies not only to financial firms but the federal government as well.
In this regard, opposition to the reform measure could also be a thinly veiled attempt to peel back the layers of federal bureaucracy that have crept up during the Obama presidency and return to a system whereby banks provide advice and access to capital while the government goes back to playing a slow hand before they both get too big for Dodd-Frank.
Sources
Jon Huntsman, Too Big to Fail is Simply Too Big, The Wall Street Journal, Oct 19, 2011
Kyle Colona - Kyle Colona is a freelance writer from the New York area with an extensive background in legal and regulatory affairs.
