Monday, May 17, 2010

FinReg is an Embarassment

It is a sad statement about the state of American politics that the current so-called "financial regulation" bill is close to final passage. This bill addresses things that had absolutely nothing to do with the 2008 meltdown in the financial markets and the economy. Instead, this bill dramatically restricts the ability of the financial markets to spur economic recovery. It will curtail bank lending. It will reduce the ability of the financial services industry to provide much needed capital to businesses. Basically, it creates a huge regulatory overhang that will strangle the American financial industry without in any way addressing the causes of the 2008 collapse. But, it will appeal to the Obama coffee house crowd who seem to understand absolutely zero about the economy.

The true causes of the collapse of 2008 are the following: 1) tax favored residential housing market; 2) Fannie and Freddie. These two guarantee another boom and bust in residential housing. These two do not exist in Canada which is why Canada did not go bust in 2008 and is the best performing economy in the world today. Are Canadians that different from Americans? No. But what is different is that items 1) and 2) above exist in the US, but don't exist in Canada.

What in FinReg addresses 1) and 2) above? The answer -- nothing. Presumably, Chris Dodd will continue to get favorable financing from the companies that he purports to regulate, but for the rest of us the situation is not so good. It's interesting to note that Elena Kagan, the recent nominee by Obama for the Supreme Court got a $ 750,000 first mortgage from Countrywide just as did Charlie Wrangle and Chris Dodd. Wonder why left wing regulators seems so popular with the predatory lenders?

So look for a stagnant economy and within about five years another speculative binge in residential housing followed by the usual bust. If you rig the tax laws so that any rational American will speculate on his home, then don't be surprised by the recurrent booms and busts in housing. In the 1980s the commercial banks lent to this boom and were crushed. In the 1990s, the S&Ls lent to this boom and were crushed. In the 2000s, Wall Street lent to this boom and were crushed. In the next boom the US Treasury (which now through Fannie and Freddie control more than half of the mortgages in the United States) will get crushed.

Thanks, Mr. President, for nothing.

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