Why do Republicans oppose the financial reform bill?

Someone asked me that question today. Is it just the current political climate? Don’t shady practices interfere with the free market system? After all, the stock market has regulations to make sure it operates as it should. Why shouldn’t we regulate these other financial markets that, when they go wrong, mess up the entire economy? Are Republicans in the pocket of the big investment banks?

Could someone explain? (Don’t look at me to do it. This English major thinks “derivative” means non-original.)

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • Pete

    I imagine it’s a “that government governs best which governs least” kind of thing. Why fund another layer of regulatory watchdogs to monitor things that ought to be the consumer’s responsibility? Particularly when, as we’ve seen, the taxpayer’s money ultimately goes not to regulatory oversight, but to pornography.

  • Pete

    I imagine it’s a “that government governs best which governs least” kind of thing. Why fund another layer of regulatory watchdogs to monitor things that ought to be the consumer’s responsibility? Particularly when, as we’ve seen, the taxpayer’s money ultimately goes not to regulatory oversight, but to pornography.

  • sg

    Financial Reform bill is a misnomer. It implies that it will improve things for consumers when likely it will not, and if it does it will be an unintended consequence. Just as banks pay insurance to the FDIC to maintain a fund (now depleted) to guarantee depositors’ assets, the new regulations will require all banks to contribute a percentage to a fund that will save large banks as necessary. Just exactly which consumers this protects, I am not sure, but this scheme to essentially tax all banks to cover the tails of the big banks is one of the objections to “reform” bill. There is also the method of resolution. There are no standards for bank failure and takeover actually listed in the bill, it will be handled by a group appointed by the president. To me that just sows seeds of discord. The opposing party will complain that the president’s appointees are acting improperly. Finally, it will be placed under the Federal Reserve, a GSE which is not transparent in any sense. It was designed to act independently. These are only a few of the objections.

    I guess it could work if run entirely by men of impeccable virtue and competence. However such a situation has yet to occur in human endeavor let alone government bureaucracy in a crony capitalist environment. So, I am skeptical.

    These objections are probably similar to those of the Republican leaders. Remember these laws are written by lawyers, not process engineers. They know how to use language to describe processes. However they do not know how to design processes.

  • sg

    Financial Reform bill is a misnomer. It implies that it will improve things for consumers when likely it will not, and if it does it will be an unintended consequence. Just as banks pay insurance to the FDIC to maintain a fund (now depleted) to guarantee depositors’ assets, the new regulations will require all banks to contribute a percentage to a fund that will save large banks as necessary. Just exactly which consumers this protects, I am not sure, but this scheme to essentially tax all banks to cover the tails of the big banks is one of the objections to “reform” bill. There is also the method of resolution. There are no standards for bank failure and takeover actually listed in the bill, it will be handled by a group appointed by the president. To me that just sows seeds of discord. The opposing party will complain that the president’s appointees are acting improperly. Finally, it will be placed under the Federal Reserve, a GSE which is not transparent in any sense. It was designed to act independently. These are only a few of the objections.

    I guess it could work if run entirely by men of impeccable virtue and competence. However such a situation has yet to occur in human endeavor let alone government bureaucracy in a crony capitalist environment. So, I am skeptical.

    These objections are probably similar to those of the Republican leaders. Remember these laws are written by lawyers, not process engineers. They know how to use language to describe processes. However they do not know how to design processes.

  • Joe

    sg makes good points. I would add that most of the problems that have caused the current economic problem steam from gov’t intervention into the housing market. I believe I have the details right (correct me if I don’t). Derivatives, in and of themselves, are not the problem – as the article points they have been around for decades – the problem is not the vehicle – the derivative – the problem is the quality of the asset that the derivative is dependent upon – ie the mortgage backed securities. These assets (at least in their current lousy form) only exist because of the perverse incentives created by gov’t policy.

    Decades ago (this is not the fault of one party), regulations and gov’t policy began requiring banks to make loans to people who could not afford them and at the same time the Fed kept interest rates artificially low there by encouraging people to buy more house than they could actually afford. Because many of these crappy mortgages were underwritten by Fanny and Freddy, they came with a implicit guarantee that they gov’t would back the loans. This created an environment where banks could take risks that they would not normally take – making the loan in the first instances and then creating products out of these crappy mortgages. The banks/investment houses were even able to insure them because of the implicit guarantee. Then when all of this malinvesting was going hot and heavy, the gov’t forced changes to the accounting rules that required “mark to market” reporting for these securities. This change in the accounting method came as some of the mortgages began to fail. Because of the new accounting rules and because the mortgages were failing at historic levels, the banks had to record the value of the securities as zero despite the fact that the majority of the mortgages were not going to default and would be paid off. Once the recorded value of the securities dropped, the insurance was triggered – thus enter the AIG bail out.

    Gov’t policy created incentives for malinvestment and then after the game was afoot gov’t policy pulled the rug out from under the entire system. I am just not sure another intervention is going to work any better. Had the gov’t not kept interest rates artificially low, had the gov’t not forced or otherwise incentivised making bad loans, had the gov’t not incentivised insuring these mortgages by giving the implicit guarantee on Freddy and Fannie backed notes, these mortgage backed securities would either never have existed or they would have been built on sound mortgages.

  • Joe

    sg makes good points. I would add that most of the problems that have caused the current economic problem steam from gov’t intervention into the housing market. I believe I have the details right (correct me if I don’t). Derivatives, in and of themselves, are not the problem – as the article points they have been around for decades – the problem is not the vehicle – the derivative – the problem is the quality of the asset that the derivative is dependent upon – ie the mortgage backed securities. These assets (at least in their current lousy form) only exist because of the perverse incentives created by gov’t policy.

    Decades ago (this is not the fault of one party), regulations and gov’t policy began requiring banks to make loans to people who could not afford them and at the same time the Fed kept interest rates artificially low there by encouraging people to buy more house than they could actually afford. Because many of these crappy mortgages were underwritten by Fanny and Freddy, they came with a implicit guarantee that they gov’t would back the loans. This created an environment where banks could take risks that they would not normally take – making the loan in the first instances and then creating products out of these crappy mortgages. The banks/investment houses were even able to insure them because of the implicit guarantee. Then when all of this malinvesting was going hot and heavy, the gov’t forced changes to the accounting rules that required “mark to market” reporting for these securities. This change in the accounting method came as some of the mortgages began to fail. Because of the new accounting rules and because the mortgages were failing at historic levels, the banks had to record the value of the securities as zero despite the fact that the majority of the mortgages were not going to default and would be paid off. Once the recorded value of the securities dropped, the insurance was triggered – thus enter the AIG bail out.

    Gov’t policy created incentives for malinvestment and then after the game was afoot gov’t policy pulled the rug out from under the entire system. I am just not sure another intervention is going to work any better. Had the gov’t not kept interest rates artificially low, had the gov’t not forced or otherwise incentivised making bad loans, had the gov’t not incentivised insuring these mortgages by giving the implicit guarantee on Freddy and Fannie backed notes, these mortgage backed securities would either never have existed or they would have been built on sound mortgages.

  • http://www.bikebubba.blogspot.com Bike Bubba

    My big problem with the bill; our current situation really arises from perverse incentives centered around bankers and other financiers knowing that if their investments go bad, the government will bail them out.

    Now what’s the centerpiece of the Obama bill? A permanent bailout mechanism for banks deemed to big to fail. See the problem? Obama worsens the perverse incentives that have been in place really since the New Deal, and which were worsened immeasurably by things such as the CRA.

  • http://www.bikebubba.blogspot.com Bike Bubba

    My big problem with the bill; our current situation really arises from perverse incentives centered around bankers and other financiers knowing that if their investments go bad, the government will bail them out.

    Now what’s the centerpiece of the Obama bill? A permanent bailout mechanism for banks deemed to big to fail. See the problem? Obama worsens the perverse incentives that have been in place really since the New Deal, and which were worsened immeasurably by things such as the CRA.

  • Tom Hering

    Did government just pull the idea of home-ownership-for-the-poor out of a hat? I suspect the mortgage, realty and home construction lobbies had something to do with it. It would have been better for the government to promote the construction of affordable rental units. Home ownership is a money pit – especially for the poor.

  • Tom Hering

    Did government just pull the idea of home-ownership-for-the-poor out of a hat? I suspect the mortgage, realty and home construction lobbies had something to do with it. It would have been better for the government to promote the construction of affordable rental units. Home ownership is a money pit – especially for the poor.

  • sg

    “Home ownership is a money pit – especially for the poor.”

    And especially if they are poor because they are poor managers.

    As for builders enjoying the promotion of home ownership, that makes sense. Also consider how home buyer refundable tax credit artificially inflate home prices. Home prices fall when there are too few buyers. A tax credit of $8K (I think) motivates a person to buy and that demand supports prices. However, it doesn’t motivate a person who thinks. The thinking person, figures that when the tax credit expires, demand will fall so prices will fall. So the thinker will buy the same house for $135k instead of $165k – $8k tax credit.

    So again, poor management, low time orientation, etc, exacerbate the problems of the poor. Laws to protect the poor need to actually protect them rather than incentivize the poor to make decisions that benefit “the community” more than individuals. So anything that motivates the poor to spend more rather than save more is not in the interest of the poor, but serves the interests of those selling.

  • sg

    “Home ownership is a money pit – especially for the poor.”

    And especially if they are poor because they are poor managers.

    As for builders enjoying the promotion of home ownership, that makes sense. Also consider how home buyer refundable tax credit artificially inflate home prices. Home prices fall when there are too few buyers. A tax credit of $8K (I think) motivates a person to buy and that demand supports prices. However, it doesn’t motivate a person who thinks. The thinking person, figures that when the tax credit expires, demand will fall so prices will fall. So the thinker will buy the same house for $135k instead of $165k – $8k tax credit.

    So again, poor management, low time orientation, etc, exacerbate the problems of the poor. Laws to protect the poor need to actually protect them rather than incentivize the poor to make decisions that benefit “the community” more than individuals. So anything that motivates the poor to spend more rather than save more is not in the interest of the poor, but serves the interests of those selling.

  • DonS

    Here is an article from the editors of the National Review explaining what conservatives object to in the current financial reform bill:

    http://article.nationalreview.com/print/?q=Yzk2ZDhhOGVhZTI4YjQyOTVlZTMwZTZlNGRiZWIyMjU=

    It’s a mistake to say that the Republicans are against financial reform. I fully expect a bill to pass this year. They are just trying to improve it. There are four principle objections which National Review raises: 1) the bailout fund; 2) the permanent bailout architecture (authority to FDIC to guarantee loans to any institution it believes is in trouble); 3) a new “consumer protection” bureaucracy; and 4) guaranteed corporate proxy access for powerful shareholders (principally unions). Other Republicans have also objected to the further expansion of the failed Fannie and Freddie institutions.

  • DonS

    Here is an article from the editors of the National Review explaining what conservatives object to in the current financial reform bill:

    http://article.nationalreview.com/print/?q=Yzk2ZDhhOGVhZTI4YjQyOTVlZTMwZTZlNGRiZWIyMjU=

    It’s a mistake to say that the Republicans are against financial reform. I fully expect a bill to pass this year. They are just trying to improve it. There are four principle objections which National Review raises: 1) the bailout fund; 2) the permanent bailout architecture (authority to FDIC to guarantee loans to any institution it believes is in trouble); 3) a new “consumer protection” bureaucracy; and 4) guaranteed corporate proxy access for powerful shareholders (principally unions). Other Republicans have also objected to the further expansion of the failed Fannie and Freddie institutions.

  • J

    Why?
    Because the black man in the White House is in favor of it. The “Southern strategy” is addictive.

  • J

    Why?
    Because the black man in the White House is in favor of it. The “Southern strategy” is addictive.

  • http://mesamike.org Mike Westfall

    J: Are you still beating your wife?

  • http://mesamike.org Mike Westfall

    J: Are you still beating your wife?

  • http://www.bikebubba.blogspot.com Bike Bubba

    Leaving aside the cheap leading ad hominems…… ;^) (well played, Mike)

    To answer the question about derivatives; they are simply a contract to buy and sell other financial instruments or contracts (hence they are “derived” from the value of the other contracts or investments, hence “derivatives”) at some point in the future.

    For example, the futures markets in grain, meat, and other commodities are derivatives markets. Now, do we want ten times more scrutiny of every futures transaction out there? What do we think that will do producers and consumers of commodities?

    If you said “it will make their lives a living Hell,” go to the head of the class. This bill isn’t about secure and safe markets, but rather about government control.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Leaving aside the cheap leading ad hominems…… ;^) (well played, Mike)

    To answer the question about derivatives; they are simply a contract to buy and sell other financial instruments or contracts (hence they are “derived” from the value of the other contracts or investments, hence “derivatives”) at some point in the future.

    For example, the futures markets in grain, meat, and other commodities are derivatives markets. Now, do we want ten times more scrutiny of every futures transaction out there? What do we think that will do producers and consumers of commodities?

    If you said “it will make their lives a living Hell,” go to the head of the class. This bill isn’t about secure and safe markets, but rather about government control.

  • D S

    Having just been subjected to the health coverage “debate”, and having watched the Democratic “leadership” strong-arm this into law, my guess is that a large majority of Republicans would object to just about anything right now, as well they should. This administration is power hungry, and needs to be held in check.

  • D S

    Having just been subjected to the health coverage “debate”, and having watched the Democratic “leadership” strong-arm this into law, my guess is that a large majority of Republicans would object to just about anything right now, as well they should. This administration is power hungry, and needs to be held in check.

  • http://spaceagelutheran.blogspot.com/ SAL

    The bill doesn’t appear to accomplish it’s main goal (to prevent financial market instability and bank bailouts).

    Surprisingly articles in the New York Times and NPR have pointed out the bill does nothing to prevent financial instability and bank bailouts.

    I think the fact that the bill funds new bureaucrats AND accomplishes nothing is a good reason to oppose it.

  • http://spaceagelutheran.blogspot.com/ SAL

    The bill doesn’t appear to accomplish it’s main goal (to prevent financial market instability and bank bailouts).

    Surprisingly articles in the New York Times and NPR have pointed out the bill does nothing to prevent financial instability and bank bailouts.

    I think the fact that the bill funds new bureaucrats AND accomplishes nothing is a good reason to oppose it.

  • http://www.newreformationpress.com Patrick Kyle

    Add to this the fact that the Dems are holding the bill up themselves in order to craft exceptions into it for their important benefactors like Warren Buffet and Goldman Sachs. How is it reform at all if the big players are excepted from the rules?

    The crooks running this show have become exponentially more brazen.

  • http://www.newreformationpress.com Patrick Kyle

    Add to this the fact that the Dems are holding the bill up themselves in order to craft exceptions into it for their important benefactors like Warren Buffet and Goldman Sachs. How is it reform at all if the big players are excepted from the rules?

    The crooks running this show have become exponentially more brazen.

  • –helen

    “…A tax credit of $8K (I think) motivates a person to buy and that demand supports prices. However, it doesn’t motivate a person who thinks. …”

    That $8K tax credit was being hawked along the roadsides (and on my apt. doorknob) with a 0% financing “cherry” on top of of the “sundae”.

    My first thought was, “They haven’t learned a thing! My second was that $8K would be ‘free rent” for 12-16 months and then the “owners” would walk, having invested nothing.
    That, I think, is what happened a lot in California and other places.
    The other thing was that the jackals who profited by “refinancing” on the way up, persuaded people to take the “increased value” of their home equity out in cash, to spend on perishables. When the market started down, they were “under water” that much faster.

    I wasn’t “motivated.”

  • –helen

    “…A tax credit of $8K (I think) motivates a person to buy and that demand supports prices. However, it doesn’t motivate a person who thinks. …”

    That $8K tax credit was being hawked along the roadsides (and on my apt. doorknob) with a 0% financing “cherry” on top of of the “sundae”.

    My first thought was, “They haven’t learned a thing! My second was that $8K would be ‘free rent” for 12-16 months and then the “owners” would walk, having invested nothing.
    That, I think, is what happened a lot in California and other places.
    The other thing was that the jackals who profited by “refinancing” on the way up, persuaded people to take the “increased value” of their home equity out in cash, to spend on perishables. When the market started down, they were “under water” that much faster.

    I wasn’t “motivated.”

  • –helen

    I reflect on Madoff, who is in jail for doing perhaps a less destructive thing than Goldman Sachs, and doing it to people who must have known that a 15% return was unlikely, and bought anyway.

    [Goldman Sachs' victims in most cases didn't know they were being robbed and certainly didn't know that GS was doing the robbing, coming and going!]

    Now, why is Madoff in jail, while the executives of Goldman Sachs are still out, collecting their $multi multimillion salaries, and feigning innocence before the Congressional dog&pony show?

  • –helen

    I reflect on Madoff, who is in jail for doing perhaps a less destructive thing than Goldman Sachs, and doing it to people who must have known that a 15% return was unlikely, and bought anyway.

    [Goldman Sachs' victims in most cases didn't know they were being robbed and certainly didn't know that GS was doing the robbing, coming and going!]

    Now, why is Madoff in jail, while the executives of Goldman Sachs are still out, collecting their $multi multimillion salaries, and feigning innocence before the Congressional dog&pony show?

  • sg

    “The crooks running this show have become exponentially more brazen.”

    They can afford to be because the government are actively electing a new people who do not understand what is going on and will vote for anyone who promises them largesse. The government could not have done this to the Puritans because they weren’t looking for something for nothing.

  • sg

    “The crooks running this show have become exponentially more brazen.”

    They can afford to be because the government are actively electing a new people who do not understand what is going on and will vote for anyone who promises them largesse. The government could not have done this to the Puritans because they weren’t looking for something for nothing.


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