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Dodd-Frank regulatory flaws stir passion at CPAC

By   /   March 18, 2013  /   No Comments

AP photo

REFORM IT: Dallas Federal Reserve President Richard Fisher says the Dodd-Frank Act should be rewritten.

 

By Kevin Mooney | Watchdog.org

WASHINGTON, D.C. – The president of the Federal Reserve Bank of Dallas says federal banking laws should be rewritten to “end the problem of banks that are too big to fail.”

Richard Fisher on Saturday was sharply critical of the Dodd-Frank Act during his presentation to the Conservative Political Action Conference.

But he stopped short of calling for its repeal.

Instead, Fisher said members Congress should “rewrite” the bill.

But that’s a point of concern to John Berlau, a financial analyst with the Competitive Enterprise Institute, because this could be taken to mean that Fisher is “advocating an additional layer of regulation on top of Dodd-Frank, rather than replacing it with more rational rules.”

GRAIN OF SALT: John Berlau is skeptical.

GRAIN OF SALT: John Berlau is skeptical.

While Fisher talked a good game, and sounded some of the right notes, his recommendations actually undermine free market principles, Berlau said.

After shrewdly invoking the memory of Ronald Reagan as a crowd pleaser, Fisher proceeded to discuss the flaws attached to Dodd-Frank. He outlined a “three-step proposal” that would eliminate the “federal safety net” for non-bank affiliates of bank holding companies, require consumers and creditors to sign off on legally bindings statements that make it clear there is no government guarantee backing up investments, and restructure banks to the point where they are “too small to fail.”

Fisher made it clear that he was speaking for himself, and not anyone else associated with the central bank. He also said he did not represent any political party.

But there is reason to be cynical, Berlau said, because throughout his public life, Fisher consistently has embraced left-of-center policy positions.

“For all the attention CPAC has attracted this year for excluding certain speakers, and narrowing the tent, it’s interesting that Fisher would somehow pass its litmus tests having never clearly renounced his past progressive positions,” Berlau said. “Particularly when he’s advocating the return of intrusive New Deal-era regulations separating banking from insurance on top Obama’s massive Dodd-Frank rules.”

Before joining the Federal Reserve, Fisher served as an economic adviser in the Carter and Clinton administrations. He also ran for U.S. Senate as a Democrat against Sen. Kay Bailey Hutchinson, R-Texas, in 1994. During the race, Fisher came out against school vouchers and expressed support for gun control.

“The reality is Fisher is a long-time operative in the Democratic Party who takes a decidedly big-government approach to bank regulation,” Berlau said. “If CPAC wanted a speaker on the causes of financial crisis, there are many conservatives and libertarians from which it could have chosen – experts who issued prescient warnings about government policies that egged on reckless behavior through subsidies, regulations, and flawed monetary policies.”

Fisher highlights regulatory burdens

However, Fisher did discuss the flaws of Dodd-Frank at some length. He also described how the “crony capitalism” underpinning the “too big to fail” mentality offends long-standing American principles.

“Dealing with too big to fail is a cause that should be embraced by conservatives, liberals and moderates alike,” he said. “For, regardless of your ideological bent, there is no escaping the reality that too big to fail banks’ bad decisions inflicted harm upon the American people during the ‘awful moment’ of the 2008–2009 crisis. The American people will be grateful to whoever liberates them from a recurrence of taxpayer bailouts.”

While Dodd-Frank was “well-intentioned,” it creates too many regulatory burdens, Fisher said. With the bill now running at 849 pages and with more than 9,000 pages of regulations written for implementation, the pledge to end too big to fail now “rings hollow,” he said.

That’s not all.

Fisher told the audience that Congress’s Financial Services Committee now estimates that 24,180,856 cumulative hours will be needed each year for affected agencies, such as the Fed, to fulfill new Dodd-Frank requirements. It’s based on figures provided by the Federal Register.

While he credits Fisher for highlighting some of the major defects in Dodd-Frank, the new rules Fisher offered as an alternative likely would limit the choices of consumers and entrepreneurs, Berlau said.

“For example, he calls for large financial institutions to be restructured to the point where they are in his words ‘too small to save,’ ” Berlau said. “The main problem with this approach is it makes no distinction among the management of the banks. It would force the breakup of financial firms that grew big through prudence rather than recklessness.”

Fisher’s plan also would force mutual insurance cooperatives to break up. This is unfortunate, Berlau said, because these institutions played no role in the mortgage crisis. Firms like USAA, which offer specialized services to members of the U.S. military and their children, should not be thought of as Wall Street banks, he said.

While Berlau said he favors “rolling back the federal safety net” he believes it should be rolled back for all financial activity.

“If a firm were forced to stop offering its customers insurance and brokerage services as a condition of its traditional banking unit receiving deposit in insurance, as Fisher implies, not only would consumers lose choices, but the financial system would likely become less stable,” he said.

Going forward, Berlau said serious reforms will be needed at mortgage giants Fannie Mae and Freddie Mac, something Fisher left out of his critique of banks.

“His new plan is virtually silent on reducing their destructive role in encouraging bad mortgages and other financial risks,” Berlau said. “Phasing out Fannie and Freddie, so that the housing market operates without implied or explicit government support, is the most important step in ending too-big-to-fail.”

Contact Kevin Mooney at kmooney@watchdog.org

 

 

 

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