My Thoughts on Financial Reform

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Someone wrote me an email asking me what I thought about the current financial reform bill. The reader asked

What is your take on the financial reform ? Is it window dressing or do you think the legislation ( Senate version ) really changes the game for the better?

Frankly , I am too cynical to give myself an objective answer to this question—hoping maybe a third party who has a sense to know what to look for could give an insightful answer. Got one ?

I started writing a response and realized that I had a new article to post! Below was my response which I expanded on in this article. This post may sound a bit more informal then my typical article.

Here are my thoughts on financial reform: I am no expert on this topic but I think that a of times media makes people believe you have to be an expert on a topic to have a say on it, when it really has a lot more to do with common sense. I think the problem with politics in Washington is the over-reliance on experts, and the lack of emphasis placed on common sense. Anyone familiar with behavioral science knows that experts are wrong a lot of the time.

I have not read the current bill it is 1400 pages nor do I know the main points of the bill. It has barely been debated and they are already voting on it. This makes me more cynical of the current political atmosphere in Washington.

I wrote an article several months ago about The Credit Retention act which I believe is very important in any bill, I am not even sure it is in the current bill, but I hope so The Credit Retention Act in short forces lenders to keep a small part of their loan on their books. One of the main causes of the financial crisis was that mortgage lenders issued loans to people that they knew could not pay back. However, the lenders would quickly sell these loans to investment banks which would package these loans and then sell them to foreign investors who thought that they were getting “AAA” securities.

I also think there needs to be a major reform of Fannie Mae and Freddie Mac. They can not exist as quasi Governmental and Quasi private organizations. They currently own about half the mortgages in America, and the Government expects them to lose hundreds of billions of dollars over the next ten years. It absolutely astounds me that the current bill does not address reform of these entities. Based on this fact alone I would vote against the bill. I am not trying to make a political statement. I try to stay as neutral as possible in my articles when it comes to political issues.

I also believe there needs to be some change in the rating agencies. Here again the rating agencies replaced common sense for “expert advice” and complex mathematical formulas.

I am not sure what I reform I would favor, however I do not think the Government should take over this role as they are just as likely to hire the same people that Moody’s and Standard and Poor’s hired to do their work. The Government has to ensure that ratings are based on common sense, instead of mathematical models which say some events like housing prices decreases are impossible. Maybe the Government could also force the rating agencies to have some skin in the game to ensure their standards are more conservative.

On the role of consumer financial protection agency which is included in the current bill I am unsure. I lean against it… To read the rest of my article on Click Here

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