Tag: financial regulation

Overcriminalization in the Financial Reform Legislation

The Heritage Foundation and National Association of Criminal Defense Lawyers (NACDL) made a stir by announcing their joint report, Without Intent: How Congress is Eroding the Criminal Intent Requirement in Federal Law. The report highlights the growth of federal criminal provisions in the 109th Congress. Many criminal statutes are drafted without the traditional requirement of criminal intent. When there is no requirement that the government prove you “willfully” or “knowingly” broke the law, mistakes are treated the same as intentional criminality. Some laws are written so broadly that it is impossible for anyone to know what conduct is illegal. Criminal provisions are included in statutes that are never reviewed by the judiciary committees of either chamber of Congress.

The NACDL has a follow-up analysis of the financial regulatory reform currently being considered by Congress. The Restoring American Financial Stability Act of 2010 has passed both houses and is heading into committee.

This 1600-page bill does everything that the Without Intent report warned against. The “reckless disregard” intent requirement is imported from tort law in several provisions and many others have no mental state requirement at all. New bribery and mail/wire fraud provisions are included where none are necessary. Bribery and fraud are already illegal.

Read the whole thing (direct .pdf link here).

Congress Begins Conference on Financial Regulation

Today begins the televised political theatre that Barney Frank has been waiting months for:  the first public meeting of the House and Senate conferees on the two financial regulation bills.  While there are a handful of important differences between the House and Senate bills, these differences are overshadowed by what the bills have in common.  The most important, and tragic, commonality is that both bills ignore the real causes of the financial crisis and focus on convenient political targets.

As our financial system was brought to its knees by an exploding housing bubble, fueled by government mandates and distortions, one would think, just maybe, that Congress would roll back these distortions.  Despite their role in contributing to the crisis and the size of their bailout, however, neither bill barely mentions Fannie Mae and Freddie Mac.   Except, of course, to continue their favored and privileged status, such as their exemption from a proposed new “consumer protection” agency.  What we really need is a new “taxpayer protection” agency.

Nor will either bill change the government’s meddling in what is probably the most important price in the economy:  the interest rate.  Given the overwhelming evidence that loose monetary policy was a direct cause of the housing bubble, one might expect Congress to spend time and effort preventing the Fed from creating another bubble.  Not only does Congress ignore the issue, the Senate won’t even allow GAO to look at the Fed’s conduct of monetary policy.

Instead of spending the next few weeks gazing into the camera, Congress should stop and gaze into the mirror.  This was a crisis conceived and born in Washington DC.  The Rayburn building serving as the proverbial back-seat of the housing bubble.

Monday Links

  • The case for high-deductible health insurance:  “Of every dollar spent on health care in this country, just 13 cents is paid for by the person actually consuming the goods or services….As long as someone else is paying, consumers have every reason to consume as much health care as is available….This all but guarantees that health care costs and spending will continue their unsustainable path. And that is a path leading to more debt, higher taxes, fewer jobs and a reduced standard of living for all Americans.”
  • Reality: The real housing crisis was the bubble, not the bust. “Washington must stop and re-learn basic economics. First, when you’re in a hole, stop digging. In the case of housing, as a country, we built too much. The cure is to build less.”

A Perfect Storm of Regulatory Ignorance

Does the government know what it’s doing, can it know what it’s doing, in financial regulation? In the latest issue of Cato Policy Report, Jeffrey Friedman doubts it:

You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging low equity mortgages; and the role of the Community Reinvestment Act in mandating loans to “subprime” borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don’t know the half of it. And neither does the government….

Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register’s state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects….

This premise would be questionable enough even if we started with a blank legal slate. But we don’t. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can’t possibly know what they all say, let alone how they might interact to create another perfect storm.

Read the whole thing – about moral hazard, banking regulations, and the “perfect storm of ignorance” that happened and will happen again – here in PDF. Less attractive HTML version here. Jeffrey Friedman is editor of Critical Review and of Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.

New Paper: Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?

Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted.

In a new study, Cato scholars Jagadeesh Gokhale and Peter Van Doren investigate those claims and dispute them.

Fixing Fannie Is Essential

This past week witnessed continued debate in congressional committees over changes to our financial regulatory system.  Perhaps catching the most attention was Fed Chairman Ben Bernanke’s appearance before House Financial Services. 

Sadly missing from all the noise this week was any discussion over reforming those entities at the center of the housing bubble and mortgage meltdown:  Fannie Mae and Freddie Mac.

While many, including Bernanke, have identified the “global savings glut” as a prime force behind the historically low interest rates that drove the housing bubble, often missed in this analysis is the critical role played by Fannie and Freddie as channels of that savings glut.  After all, the Chinese Central Bank was not plowing its reserves into Countrywide stock; it was putting hundreds of billions of its dollar reserves into Fannie and Freddie debt.  Fannie and Freddie were the vehicle that carried excess world savings into the United States.

Had this massive flow of global capital been invested in productive activities, or even just prime mortgages, it is unlikely tha we would have seen such a large housing bubble.  Instead, what did Fannie and Freddie do with its Chinese funds?  It invested those funds in the subprime mortgage market.  At the height of the bubble, Fannie and Freddie purchased over 40 percent of private-label subprime mortgage-backed securities.  Fannie and Freddie also used those funds to lower the underwriting standards of the “prime” whole mortgages it purchased, turning much of the Alt-A and subprime market into what looked to the world like prime mortgages.

Given the massive leverage (at one point Freddie was leveraged 200 to 1) and shoddy credit quality of mortgages on their books, why were the Chinese and other investors so willing to trust their money to Fannie and Freddie?  Because they were continually told by U.S. officials that their losses would be covered.  At the end of the day, Fannie and Freddie were not bailed out in order to save our housing market; they were bailed out in order to protect the Chinese Central Bank from taking any losses on its Fannie/Freddie investments.  Adding insult to injury is the fact that the Chinese accumulated these large dollar holdings in order to suppress the value of their currency, enabling Chinese products to be more competitive with American-made products.

While foreign investors have been willing to put considerable money into Wall Street, without the implied guarantees of Fannie and Freddie, trillions of dollars of global capital flows would not have been funneled into the U.S. subprime mortgage market.  As Washington seems intent on continuing to mortgage America’s future to the Chinese, that at minimum it seems that fixing Fannie and Freddie might help insure that something more productive is done with that borrowing.

Monday Links

  • The true cost of financial regulation: “A detailed anatomy of the bubble shows that many of the policies and regulations meant to reduce financial risk actually increased it.”
  • Government: “Hey, let’s start meddling in the Internet business.” A better idea: Preserve net neutrality without regulation. Here’s how.