06.29.2010 0

Massive Government Overreach in Dodd-Frank Financial Conference

By Robert Romano

This week, at least one house of Congress is expected to vote on the Dodd-Frank conference legislation. The bill threatens to take over the nation’s financial sector, redistribute wealth on a scale never seen, levy unlimited taxes, monitor finances, seize politically disfavored firms, and bail out favored ones, all without any vote in Congress or the right to judicial review.

Far from “reform,” it will not address any of the root, government causes of the financial crisis. Those include the easy money and loose lending policies of the Federal Reserve, Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of House and Urban Development that fueled that housing bubble in the first place.

Despite the opportunity to work out troublesome provisions contained in the bill at the conference committee, nearly all of the most egregious usurpations of liberty and property remain. Conferees apparently took an approach to governing that does not include the representation of the people that oppose this sort of massive government overreach that is sadly endemic throughout the legislation — and has come to be expected under the Obama Administration.

ALG has updated two of its key summaries on the legislation, the first detailing the bailout and government takeover powers in the bill, and the second outlining the threat posed to individual privacy through the Office of Financial Research.

Under the bill, as before, any company — even non-financial companies — can be seized just as GM and Chrysler were under the Troubled Asset Relief Program (TARP). Although they were only automakers that posed no systemic risk to the financial system and despite the fact that there were private sector alternatives to government assistance, government arbitrarily applied TARP to them.

The same thing will happen again under the Dodd-Frank bill. Only, this time, there will be no stop to the bailouts and takeovers, which will be financed under an unlimited “orderly liquidation fund”. The money will come from “risk-based” assessments levied by the Federal Deposit Insurance Corporation (FDIC) on institutions totaling $50 billion or more in assets.

That’s taxation without representation, as they will occur without any vote in Congress as is constitutionally required. It’s a hefty tax, too, for the American people. According to a Congressional Budget Office (CBO) analysis of a similar bank tax proposal by the Obama Administration, “the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain.”

One provision that was added in conference also provides for a $19 billion “financial crisis special assessment” fund that includes even more assessments on banks, hedge funds, insurance companies, and other institutions. The costs of which, too, will be passed on to the American people.

Making matters even worse, the bill still includes an Office of Financial Research (OFR) that empowers the office, to “collect, validate, and maintain all data necessary” to maintain the “financial stability of the United States.” That information would be “obtained from member agencies, commercial data providers, publicly available data sources, and financial entities.” That is data on every financial transaction in the country the Office says that it needs to monitor, giving rise to grave privacy concerns.

According to the bill, the OFR would “require the submission of periodic and other reports from any financial company for the purpose of assessing the extent to which a financial activity or financial market in which the financial company participates, or the financial company itself, poses a threat to the financial stability of the United States.” The bill even grants the Director of the OFR subpoena power to require “the production of the data requested … upon a written finding by the Director that such data is required” to maintain financial stability.

Such are just some of the many overreaches in the Dodd-Frank bill. But, as bad as what the bill contains is what it does not. Specifically, the bill does nothing to rein in the root, government causes of the financial crisis.

For instance, although it was contained in the House version, the conference bill does not audit the Federal Reserve, whose easy money, low interest lending policies fueled the housing bubble. As noted by Stanford economic professor John Taylor stating that “the Fed’s target for the federal-funds interest rate was well below what the Taylor rule would call for in 2002-2005. By this measure the interest rate was too low for too long, reducing borrowing costs and accelerating the housing boom.” Without the Fed’s easy money, the financial crisis could not have happened.

That is not all. The bill will not address federal housing policy that created the legal framework for all of the bad loans to be given in the first place. Last year alone, there were 3.9 million foreclosure filings, with another 4 million expected this year, all evidence of the gross miscalculation that was made by federal policymakers, who have a de facto monopoly on housing finance.

According to research by former chief credit officer of Fannie Mae, Ed Pinto, Fannie Mae and Freddie Mac weakened mortgage underwriting standards and mislabeled high-risk mortgage-backed securities, defrauding investors. The Federal Housing Administration (FHA) lowered down payments on mortgages. And the Department of Housing and Urban Development’s (HUD) Community Reinvestment Act regulations and “affordable housing goals” reduced lending standards and forced banks to give loans to lower-income Americans that could not be repaid.

All of these entities and policies emerge unscathed by the Dodd-Frank conference report. The bill even goes so far as to prohibit the liquidation of Fannie Mae and Freddie Mac. Apparently, Senator Chris Dodd and Representative Barney Frank — the great GSE apologists — realized that under previous versions of the bill, regulators could have made a systemic risk determination on Fannie and Freddie. That conceivably could have resulted in their liquidation without any Congressional approval.

And Dodd and Frank couldn’t have that.

All of which tells the American people everything they need to know about this legislation. Government wants to rein in the activities of everyone and anyone — except for the government entities that and the policymakers who created the crisis in the first place. Including Dodd and Frank.

Robert Romano is the Senior Editor of ALG News Bureau.

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