Warning

Everything on this blog is the truth, which is pretty fucking scary. Well, some of it is wild conjecture, but that is pretty scary too.

Wednesday, July 14, 2010

Why Financial Reform Won't Work: Part 1

I have been ranting about financial reform legislation and how it won't work and will probably have horrible unintended consequences but before today, I didn't spell out why I feel that way.  Today, I decided to spell it out after I received a email from Barack Obama's people telling me to call Senator Grassley and convince him to vote for the combined bill.  The email came in with the subject of Urgent and claimed the legislation is the "boldest overhaul of the financial system since the Great Depression."  I like the use of the word boldest in this sentence because bold does not equate to intelligent, well designed, or effective.  Once, my co-blogger after drinking for twelve hours, stole a golf cart at a NASCAR race and proceeded to drive in small circles turning left and screaming, "Guess who I am?  I'm a NASCAR driver."  This was a bold move, one of his boldest.  It does not qualify as one of his most intelligent or positive moments and it could have landed him in jail.  Sometimes bold moves, while funny as hell, are not good ideas.

What I hate most about the legislation is the creation of a  Consumer Financial Protection Bureau.  You might wonder why I could hate something that sounds so innocuous and the answer lies with where it will be housed:  The Federal Reserve.  We are supposed to be comforted by the fact that it is an autonomous bureau with a single director.  Look, there is no independent agency or bureau in all of Washington D.C., I don't care what they are intended to be.  Furthermore, how autonomous were you when you lived under your parents roof?

The Federal Reserve is one of the 5 major players that created the crisis we find ourselves in and they have no business being anywhere near a bureau intended to protect consumers.  They fueled the crisis, failed to recognize it, and then sold consumers down the river in the bailout mess.  Putting a Consumer Protection Bureau there is like assigning lions to be security detail for gazelles.

Another key element of the package is regulatory control and accountability for the ratings agencies.  The problem with this is that the regulators have to understand what the agencies are doing and what the products are they are actually rating.  Half the instruments Wall Street are trading are so convoluted that people within the firms trading them don't know what they are.  How could a regulator possibly know what the ratings agencies are doing or what they are rating?  Someone smart enough to get it isn't going to work as a regulator, nope, they will go to work on Wall Street inventing new instruments of debt and new ways to sell it.  Don't even get me started on the corruption inherent in regulation anyway.


It's very simple; Consumers need to protect themselves.  If we have gotten so collectively stupid that we think the government can protect us than we are totally screwed as a nation.  The government couldn't protect us from September 11th, then the government created the conditions for the housing crisis, and I'm not sure if you noticed; the government can't fix the economy either.  The best the government can do to help the consumer is encourage financial education in the schools and mandate more economics courses for our students.  Even that won't solve the problem.  When people want to do stupid things (think NASCAR story above), they will find a way to do them. 


The email from Barack's people claimed that the bill would end the exploitation of the consumer by ending hidden fees and pages of small print.  The pages of small print you get with a loan application are there because of regulations, trust me when I say we would have preferred to not send you fifty pages of documents to get your loan approved.  If you think there is small print now, just wait.

The truth is, when I was a loan officer, my customers didn't read the disclosures I sent them.  They looked at two things:  their monthly payment and their closing costs.  They signed fifty pages of disclosures without reading them.  Most of my customers would get their loan package and call me and ask for the Cliff Notes, which I was more than happy to provide them.  If you really ever read a loan package and understood everything in it, you probably would not want to get a loan.  There is a clause in most loan documents that if you make any material changes to your home without notifying your mortgage company they can call the note due and demand full payoff.  How many people know that?  How many people know that and tell their mortgage company that they turned a bedroom into a stripper lounge?

I don't have the answers on how this gets better but I think it starts with us getting smarter, which is not too promising and quite frankly, makes me fear for the future.

2 comments:

  1. I agree that we need to get economically smarter, but how? Government schools? Isn't that another case of assigning the lions to protect the gazelles? You have had an extensive education in economics. But how many classes did you have to take before hearing some of the hardcore truths about our economy and the Federal Reserve?

    I think it all comes down to the truth you said above : Consumers need to protect themselves. Caveat Emptor.

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  2. We already have government run schools and while I agree that it is lions to protect the gazelles, it is there. I think I point it out because if the government was really wanting to solve the problem, that is the only solution they could be a part of. But you are right, the utmost truth I uttered was that consumers need to protect themselves.

    I learned about the Federal Reserve on my own, but I had an incentive to, I am distrustful of any organization that big and powerful. Oh, and also, I am not a big fan of the government being involved in the economy.

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