Financial System Needs Less Regulation,

Monday, September 14, 2009

Mark A. Calabria, director of financial regulation studiesmcalabria@cato.org:

While there is no doubt our financial system is in need of financial reform, the plan articulated by President Obama on Wall Street today would make bailouts a permanent feature of the regulatory landscape. Rather than ending "too big to fail," the president wants us to believe that with additional discretion and power, the same Federal Reserve that missed the boat last time will save us next time.

The truth is that the President's plan would permanently put the "too big to fail" tag on a small, select group of companies. These companies would see their funding costs decline, allowing them to gain market-share at the expense of their rivals, making these firms even larger. Greater concentration in our financial services industry is the last thing we need, yet the Obama plan all but guarantees it.

Obama also chooses myths over facts. The president claims that de-regulation and competition among regulators caused the crisis. The facts could not be more different. Those institutions at the center of the crisis—Fannie Mae, Freddie Mac, Bear Stearns, Lehman—could not "choose their regulator," as the president put it.

The president's plan chooses convenient targets and protects entrenched interests, rather than address the true underlying causes of the crisis. At no time have we heard the president discuss the expansionary monetary policies that helped fuel the bubble. Nor has the president talked about the global imbalances—the global savings glut that poured surplus savings from the rest of the world into the U.S. But then the president appears to hope that loose monetary policy and continued American consumption funded by China will get him out of his own political problems with the economy. It is especially striking that the President makes little mention of the housing bubble, as if it was only the bust that was the problem.

Without real reform—fixing Fannie and Freddie, scaling back the massive subsidies for leverage in our tax code, loose monetary policy—it will only be a matter of time before the next crisis hits. If we implement the President's plan, we will, however, guarantee that the next crisis will be even larger and severe than the current one.

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