Wall Street Blues

Why the House's new financial reform and consumer protection bill is bad for America


Last week, the House Financial Services Committee approved the final piece of a sweeping overhaul of Wall Street regulations proposed by Rep. Barney Frank (D-Mass.). The full House is schedule to begin debate on the bill today, and a vote could come as early as this weekend as representatives rush to pass the legislation before the Christmas break.

The 1,300-page bill, known as The Wall Street Reform and Consumer Protection Act of 2009, establishes a Consumer Financial Protection Agency, a systemic-risk oversight council, new capital requirements for financial institutions, and a "resolution" authority for non-banks. It also requires financial products like derivatives to be more transparent, overhauls rating agency laws, changes securitization rules, and alters the FDIC bank rescue fund. In short, it seeks to radically change the way Wall Street does business.

The intentions behind the bill are noble, particularly the desires to protect consumers, stabilize the market, keep banks accountable, and ensure fair competition. However, the proposed rules will not actually accomplish any of this. There are five main reasons why the Wall Street Reform Act will be bad for the financial industry and bad for America.

It Formalizes "Too Big To Fail"

Although the major Wall Street firms were never explicitly listed as being "too big to fail" before the crisis, there was always an implicit guarantee from Uncle Sam. That is why Lehman Brothers was shocked when it was forced into bankruptcy. After all, history had shown that regulators didn't have the stomach to let big financial intuitions go under and negatively impact the market. The implicit guarantee altered the risk management psyche of Wall Street executives over the decades, and was a contributing factor to the massive build up of toxic debt.

President Barack Obama, Treasury Secretary Tim Geithner, Fed Chairman Ben Bernanke, and others have all insisted that future Wall Street reforms must end the policy of too big to fail. Yet the current House proposal does just the opposite. The Frank bill vests the Financial Stability Oversight Council with the authority to require "stricter prudential standards" for excessively large or interconnected financial institutions. Furthermore, the Council is required to publicly announce who will be subject to the tighter regulations. Combined with a new $200 billion bailout fund, this amounts to nothing less than the government naming firms too big and too interconnected to fail. In no time, the banks would become like government-sponsored enterprises, "J.P. Morgan Mae" and "Citi Mac."

It Protects Consumers To Death

The House bill includes the creation of a much-publicized Consumer Financial Protection Agency (CFPA). This independent agency would absorb all consumer protection authority from the Federal Reserve and work to ensure the safety of consumers who use financial products like bank accounts, mortgages, and credit cards. Again, it's a noble idea, but it would wind up protecting consumers and businesses to death.

The CFPA will also have the authority to issue burdensome new rules for everything from banks to Wal-Mart to your local newspaper. This will particularly hurt small businesses by decreasing their access to credit and increasing the cost of doing business. And many of those costs would get passed on to the consumer. Furthermore, the CFPA would spawn a massive bureaucracy and create severe conflicts between state and federal law. The agency would even have the power to write and enforce laws beyond the scope of existing legislative authority. There are good ways of reforming consumer protection. The Consumer Financial Protection Agency is not one of them.

It Cripples Prospects for Economic Growth

The House bill creates a new "bailout authority" for non-banks to make sure companies like A.I.G. and Lehman can be easily rescued in the future. This is paid for by a $150 billion tax increase for large financial firms, including those that pose no threat to market stability. This tax will certainly be passed on to consumers, which will hurt both demand for services and decrease the disposable income of individuals and families—both of which are essential to economic growth.

Tax increases are rarely beneficial, but they can be particularly problematic during financial downturns. The tax hike would literally decrease the capital that firms have, making it harder to post a profit, pay workers, and produce affordable goods. Furthermore, the proposed increases in capital and liquidity requirements mean that companies will have less money to develop their businesses with. Combined, the reform package won't work to promote recovery, it will stifle it.

It Damages Employment Opportunities

By increasing the costs of consumer goods and hurting business growth, the Wall Street reform bill simply exacerbates the unemployment problem. By increasing compliance costs for the energy, commercial real estate, manufacturing, automotive, and healthcare industries (to name a few), the bill will leave businesses with less money to hire and retain employees.

The Frank bill also grants federal financial regulators the power to set wages for all employees working at any financial institution under their jurisdiction. From CEOs to janitors, the government will have the authority to approve compensation packages and reject those that don't meet its arbitrary, politically influenced standard. This won't help companies be able—or willing—to hire more workers in the near future.

It Ignores the History of Unintended Consequences

The financial crisis was ultimately the result of decades of well-intended federal policies that had severe negative unintended consequences. Nothing epitomizes this more than the tragic failure that is the Fannie Mae and Freddie Mac mortgage duo. These firms were at the center of the problems caused by mortgage securitization and capital requirement manipulation. Yet the reform bill's sweeping scope does nothing to address these government-sponsored enterprises.

In general, the bill before the House would do more harm than good. There are some useful provisions in here, like breaking the rating agency oligarchy and increasing accountability for the Fed. But ultimately the CFPA and financial stability legislation are only going to hurt small businesses, create moral hazards, reduce competition, and codify the disastrous "too big to fail" doctrine. That's not the type of reform we need.

Anthony Randazzo is director of economic research at Reason Foundation and author of the study "Rebuilding Wall Street: A Review of the White House Proposal for Reforming Financial Services Regulation."

NEXT: Stimulating Mark Penn's Job

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. I love the ‘too big to fail’ clause. What’s the purpose of even trying if you know the government is just going to give billions of dollars for sucking? It’s like forcing everyone to be your customer!

  2. Apparently “too big to fail” applies to Barney Frank, too. He was in complete denial about how the feds were forcing banks to make home loans to people who couldn’t afford them. And yet, they put the guy who fucked things up in charge in fixing the mess he presided over.

    1. Yes, Barney Frank was the king-emperor-dictator when the Republicans had control over Congress, Senate, and White House.


      1. Wow that is quite a reasoned response there. You really know your stuff.

        1. So am I wrong?

          1. No, you were not wrong. Now, do you accept as fact (because it IS a fact) that Barney Frank had a lot to do with the housing bubble?

      2. IIRC, the relevant changes in the law occurred during the Clinton administration. And the original version of the statute was passed during the Carter administration.

        As for Bush, he was a “compassionate conservative,” don’t you remember? Hardly the stuff that libertarians celebrate. And the GOP had a razor-thin margin in Congress during his administration. They weren’t going to rock the boat and be accused of “trying to make people homeless” or some other BS charge.

        Out of curiosity, has Barney Frank ever held a private sector job? If not, it would explain a lot.

      3. Crayon, you dolt, just because there were other asswipes, including Republicans, that enabled the nightmare that is Fannie and Freddie (and fucking still is – Barney’s still rolling the fucking dice), doesn’t mean that fat fuck doesn’t deserve a verbal thrashing for his role. Especially considering the fact that his little fat dickbeaters are writing the shitty legislation. Classic dipshit liberal response.

        An arrogant fat fuck neighbor throws a bag of shit against the side of your house. “Fuck, my arrogant fat fuck neighbor threw shit all over my house!” Crayon – “another neighbor threw some shit on your house too.” Thanks fuckhead, I still have shit on my house and the fat fuck neighbor is out front with a fucking catapult loaded with a dump truck worth of shit aimed at my house.

        Oh yeah, make sure you only fill your moped up with Shell gasoline. I heard it’s the best. All the other gas comes from a-rabs like al quaeda.

  3. I can safely assume that it is a terrible bill for America, simply by knowing that Barney Frank has anything whatsoever to do with it.

  4. They LET Barney Frank put his name on this shite ?

  5. Millions of wonderful people died in the 1980s AIDS epidemic. We lost so many geniuses in so many areas. And somehow it managed to miss Barney. Makes you think there is no God or at least a just one.

    1. And somehow it managed to miss Barney.

      The damned bastard used protection . . .

      1. Could we give up Barney and get Freddie Mecury back?

      2. …too fat to fail…

    2. Maybe he couldn’t find any takers.

  6. It’s a shame Flight 93 failed to reach its target.

  7. Really, limiting people’s access to credit under the guise of consumer protection, that’s bad, no question, but the real mystery is why Barney Frank isn’t the most hated man in America.

    1. the media?

    2. Because hating him would be a federal crime…

      … Didn’t you know that? He’s in a “protected group”, and no, it is not the “corrupt sleazeball” group, but the gay group.

      1. You know, I wasn’t really goin’ for that. I was goin’ for more of his hand in the bailouts, TARP, etc.

        And here I thought I was a big tent libertarian! I guess I’m not, really. Sometimes more isn’t merrier.

    3. Barney Frank is such a blowhard.

    4. Because Frank’s sleazy financial shenanigans are too complicated and boring a subject for the media to cover, compared to, say, the sexual habits of professional golfers.

    5. Because everyone knows that Fannie Mae and Freddie Mac were not in the least scandelous or had anything to do with the financial crisis. Therefore Frank’s covering up of their scandels and role in the financial crisis has nothing to do with anything.

      Now, please look away from the man being the curtain. These are not the droids you are looking for.

  8. The 1,300-page bill,

    You know, let’s name these bills Arthur Harris bills – you know, for the 1,000 plane bombing raids. They’re just as foolish and just as destructive.

  9. We need a “Government Protection Act”. The one passed in 1791 obviously isn’t working.

  10. I hate the GOP, but they better kick some serious ass next November.

  11. It would be helpful if you stopped putting his picture on the H&R page… I almost hurled my brunch.

    1. I found it mesmerising.

    2. I can’t afford brunch. Thanks, Barney!

  12. Barney Frank is such a blowhard.

    “Blow” is just a figure of speech.

  13. #1 is right on, instead of formalizing to big to fail, we MUST break up the big banks. Failure will never be an option for those banks no matter how much libertarians/austrian economists think it’s a good idea. Thus breaking them up becomes the only viable option. If a bank failure will wreck the economy, make it small enough that it can fail without wrecking the economy.

    #2, maybe so, although you really don’t give many concrete examples. That being said, it has been demonstrated that there are so many MILLIONS of idiots out there just waiting to take out equity to go on vacations, and buy SUV’s that some regulations do need to be in place. Of course if the FED stopped pumping money into the economy, maybe this wouldn’t be a problem. I’m willing to wait and see on this one.

    #3 won’t be a problem if you split up the big banks. Also, vastly reduce credit defualt swaps, and the rest of the toxic financial bullshit ideas that have been billed as innovation.

  14. “Too big to fail” has only been formalized in the sense that “too big to fail” institutions will essentially have stricter capital requirements and be made to pay fees which equate an insurance policy which does not bail out the bank itself, rather resolves the institutions outstanding debts while forcing the company into bankruptcy

  15. Barney Fag needs to hang.

  16. My only point is that if you take the Bible straight, as I’m sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won’t get the full deal by just doing regular skill english reading for those books. In other words, there’s more to the books of the Bible than most will ever grasp. I’m not concerned that Mr. Crumb will go to hell or anything crazy like that! It’s just that he, like many types of religionists, seems to take it literally, take it straight…the Bible’s books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on…the Bible’s books were written by people with very different mindsets

  17.…..-p-35.html It is so awesome to see these videos.
    Great work?

Please to post comments

Comments are closed.