Friday, December 11, 2009

Financial reform bill nears passage with lots of sausage 

The House Rules committee reported out a rule for hearing H.R. 4173, the Financial Stability Improvement Act of 2009. It has a number of very noxious provisions in it and I am hopeful that measures will be taken to slow this down and get the bill fixed. Many of these I wrote about last July are still in this draft.

One provision many of my friends may like is at the beginning, where the act orders an audit of the Federal Reserve's actions during the financial crisis and its use of emergency powers. This has been the subject as well of work my friend Vern McKinley has been doing through a FOIA action. I need to get him back on the air to talk about this, but that will have to wait a week or two.

The text is 1,316 pages, and it will take a week (while I'm grading papers) to sort through all of what is in here. There is a council envisioned to decide who gets called a bank that could pose systemic risk; if you are determined to be one, you face a 15-to-1 leverage limit. Secs. 1104 and 1105 give a new council wide powers to determine what activities a financial firm can undertake, with whom they can merge, capital limits, etc.

I am not now and never have been in favor of expanding the Federal Reserve's power in the direction of supervising non-banks. It should have one job -- preserve the value of our money. To borrow from Russ Roberts' recent piece in The Economists' Voice, controlling money supply growth is like controlling airplane flight -- most of the mistakes are either pilot/chairman error, with mechanical catastrophes a very secondary effect. Financial systems are not that at all, and asking the Fed to do two tasks not only means they do the one they can't do poorly, but it impedes them from doing well the thing they could do well.

The bill may be passed this weekend, and the Rules vote appears to fast-track this for passage next week. There are several amendments to it that we can't see yet. So ask your congressperson to support sending this back to committee for further work.

P.S. I'm aware that the Republicans are seeking to get the TARP extension out of this bill; while I support that fully, there is so much more wrong with this bill that we need the motion to recommit to say more than that.