Friday, July 9, 2010

I am From the Government and I am Here to Help

The title of today's post comes from a famous quote by Ronald Reagan. According to him, those are the scariest words ever uttered.

As we near the finish line on the Dodd Frank Bill, it is clear that the prevailing attitude which is apparent throughout the pages of this bill is, "I am from the government, and I am here to help."

As I look through the pages of the final bill, I see new entitlements in the form of additional funding to the Making Home Affordable Program which will subsidize mortgages for those who are unemployed and in the form of entitlement programs to create mainstream access to financial institutions for those relying on payday lenders and check cashing institutions. Those programs are going to get a lot of press because people love giveaways. On the Monday after financial reform passed through conference, I got a phone call from a young woman from a very affluent family in El Paso asking me about the changes to HAMP program which will allow her to get a principal reduction on her mortgage. That's all many people are going to hear--"What can I get out of this that is free?"

I also see a lot of new restrictions and limitations on freedom, and these apply mainly to consumers and small businesses. No longer are you as the consumer going to be able to decide what you can afford in the way of a mortgage, or how you should be able to invest in the stock market. The government is going to be "limiting" the types of mortgages that are available and apparently determining the financial literacy of investors.

Who gets hurt in this? The middle class, the small business owner, the man or woman who works hard for a living and is hoping to move ahead in life. Those of us who work hard each day and start our own businesses, pay our taxes, and do not rely on the government for help are ultimately going to have fewer options to borrow money, less access to credit, and less access to investment options for our money. The government will be studying us to determine whether we are smart enough to make positive choices about loans and investing. The price of security is often freedom, and in their promise to keep us safe from ourselves, they must tell us what we may and may not do.

Who benefits? The banking giants who got the bailout money in the first place. This is the real irony of the financial reform bill, and it is a fact agreed upon by both liberals and conservatives who are angry about this bill. I read an opinion piece this morning by a liberal blogger furious at the Democrats and the Obama Administration because the financial reform bill basically gives more power to the giant banking lobbies. A Newsweek article published June 25, echoes this same sentiment with the headline, "Financial Reform Makes the Biggest Banks Stronger." In the article, author Michael Hirsh quotes a former U.S. Treasury official who insisted on remaining anonymous but has followed the bill closely, "The bottom line: this doesn't fundamentally change the way the banking industry works. The ironic thing is that the biggest banks that took most of the money end up with the most beneficial position, and the regulators that failed to stop them in the first place get even more money and discretion." Hirsh continues, "Indeed the bill may make these banks even more critical to the economy and therefore even more likely to be rescued in some future imposing new capital charges that will create barriers to entry for new firms, especially in swaps and other derivatives, while at the same time permitting giant bank holding companies to continue controlling most of what they were before, 'we've consolidated the position of the five banks that were most central to the crisis.'" The five banks he is talking about are JP Morgan, Goldman Sachs, Bank of America and Morgan Stanley and Citigroup. He also throws Wells Fargo into the mix, for now. (If I were an executive at Wells Fargo I would be very nervous about being number six since Treasury officials keep insisting the final number is five.) Hirsh also quotes a former Federal Reserve official as stating, "It makes it tougher now to kiss somebody off when they get into trouble."

What the Dodd Frank Act is ultimately about is the consolidation of wealth and power into a few hands. The mortgage industry, for instance, was an over $3.2 trillion dollar industry a few years ago, but those dollars were spread among many small businesses--small mortgage brokers, small mortgage banks, and small independent mortgage lenders who packaged their loans and sold them. There were a lot of players and a lot of competition, which kept costs down.

The Dodd Frank bill makes the cost of business higher for smaller players. The entire focus of the bill is on making business more difficult and more expensive so that the smaller, less well capitalized entities will wash out, which then leaves the largest entities more empowered.

Consumers are going to see a difference as the smaller players now disappear completely and only the larger companies are left. Taxpayers are going to see a difference the next time that these companies need help. As Hirsh points out, the Federal Reserve cannot bail out any one firm, but it can supply liquidity to shore up the entire system, and since the five surviving major banks have become the five pillars of the US financial system, if one of them wobbles, the entire system is endangered, thus justifying a bailout to save the system as a whole.

What is most disturbing about this whole thing is that while financial reform is just becoming a reality next week, the processes that allowed it to happen have been going on for years. The former president of the former Ohio Savings Bank reportedly told his staff in 2003 just at the beginning of the real estate boom, "When this is over, there will only be five major banks left." That was well in advance of the height of the boom or the subsequent bust. An AE for Ohio Savings Bank at the time repeated his statement to me in 2007. I have never forgotten it. Was it prophecy, or did he know that what we are seeing today is not a reaction to the stock market freezing in 2008 but a well thought out and orchestrated strategy which was developed years ago to fundamentally change the American system? I don't really subscribe to conspiracy theories, but this situation really makes me wonder who is pulling the strings of our government and our financial system.

John Boehner has taken a lot of criticism lately for equating the Dodd Frank bill to using a nuclear weapon to kill an ant. I like the analogy, but I think it needs tweaking. I would say that this is more like using a nuclear weapon to kill an ant, missing the ant, and annihilating all life within a thirty mile radius. This bill will fundamentally change the way we live, work, save money, invest money, and manage our money in this country. And when it is all over, only the chosen elites win.

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