Thursday, November 4, 2010

Don't Start Celebrating Just Yet

As we put away our confetti and noisemakers from election night, most of us in financial services are wondering what Tuesday's election means for us in real terms.  In the wake of three years of massive regulatory change, we are all wondering whether the new landscape in Washington is going to relieve any of our immediate problems in the housing market.

An article in aptly titled, "Reprieve for Wall Street is Expected to be Limited," confirms what many of us already suspected--there is a long road ahead and we should not expect any meaningful change any time soon.  WSJ quotes Brian Gardner of investment banking firm Keefe Bruyette & Woods as saying, "The chances of significant changes to Dodd Frank are very, very low."

Aside from the obvious fact that Dodd Frank was a key Obama-Reid-Pelosi initiative and only one third of that team has been replaced, WSJ cites another factor which I found fascinating.  The newly elected tea party lawmakers tend to be hostile to Wall Street.

If you think about it, this is really an interesting twist.  While I wrote yesterday that I don't trust politicians, the reverse is also true--politicians do not trust people working in financial services.  After all, we have been vilified and blamed for every major problem in the last two years.  The outrage over TARP and stimulus funds and images of Wall Streeters living high on tax dollars helped give birth to the tea party movement.  So will these new representatives really understand the dangers posed to business and consumers by Dodd Frank and the other cumbersome regulations that we have today?  Will they even be willing to discuss legislative changes which they may perceive will benefit industries that they blame for all of the economic woes of the world?  It is going to be interesting to see.

Where the new Congress can make real inroads is in issues such as federal oversight.  For example, with a new Senate, Elizabeth Warren, the interim director of the Consumer Financial Protection Bureau, may not be able to pass confirmation.  However, we can be certain that even if her nomination to the position is shot down, the White House is going to look for another equally left-leaning individual to take her place.  Bloomberg Business week speculated in an article today entitled, "Firms that Fought Dodd-Frank May Gain Under the New House." that the new Senate may compromise by confirming Warren as director of the CFPB in exchange for moving funding of the Bureau from the Federal Reserve to Congress.   Right now the CFPB is autonomous, so giving Congress funding authority would give them some oversight over the agency.

Neither Wall Street nor the U.S. Chamber of Commerce appears to be advocating for a genuine dismantling of Dodd Frank.   According to the WSJ article,  David Hirschmann, President of the Chamber's Center for Capital Markets Competitiveness, says, "We don't advocate for starving the regulators of funding,; that doesn't help business."

The problem with chaining up a huge beast like the Consumer Financial Protection Bureau is that 1: Even a chained monster is hard to control--(think King Kong) and 2:  Subsequent administrations can just break the shackles and turn it loose.  Dodd Frank gives the federal government unprecedented authority to regulate and seize control of private businesses if the regulators decide that they are a potential threat to the economy.  Any attempt to muzzle that kind of authority can only short term at best.

I understand that attempting to repeal Dodd Frank is a wasted exercise at this moment.  But just because it is not possible today, or for the next two years, does not mean that it should not be the goal.  The progressives who got this legislation passed worked for years with singleness of purpose toward the day when their vision of the U.S. would be encoded into law.  We should do no less than devote ourselves with the same single mindedness to seeing this assault on business and individual freedom completely dismantled.  Any other goal is an unacceptable compromise which all of us will pay for eventually.

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