Posts Tagged ‘reconciliation’

Anthony Downs On Financial Reform

Tuesday, August 31st, 2010

Anthony Downs discusses the ins and outs of financial reform.  The nation’s financial system needs significantly more regulation than exists now.  The lack of tough regulatory powers strongly impacted the recent financial crash and the Great Recession that ensued.  The good news is that the Obama administration is moving firmly in this direction with financial reform legislation a critical item on its agenda.  This is the opinion of Anthony Downs,  a senior fellow with the Brookings Institution and former President of the Real Estate Research Corporation.  In a recent interview for the Alter NOW Podcasts, Downs said that between 1980 and 2007, the value of international capital markets – including bank deposits, assets, equities, public and private debt – quadrupled relative to the world’s GDP, lifting millions of people out of poverty.  Although unprecedented, this growth relied heavily on borrowed money to finance higher living standards and highly leveraged loans with limited reserves backing them.  In the end, the growth was unable to be sustained.

The financial reform legislation currently undergoing reconciliation by a Senate-House conference committee is not a reinstatement of the 1933 Glass-Steagall Act – which separated investment and commercial banking — because banks will still be allowed to deal with securities.  Under the new law, banks will have to register derivatives with some type of formal exchange and maintain records on who is borrowing money and under what terms.  This marks a significant change from before the Great Recession, when derivatives were traded with virtually no oversight.

Downs believes that former Federal Reserve Chairman Alan Greenspan contributed to the financial crisis in two ways.  In 2001, when Greenspan was informed that there was fraud in the subprime housing market and that he should do something about it, he refused to take action because he didn’t believe in regulation.  According to Downs, “that was a terrible mistake and meant that all the horrible loans made in the subprime market could continue unchecked.”  Greenspan’s second error was to maintain low interest rates for as long as he did at a time when an enormous amount of capital was coming into the United States economy from overseas.  Because investors were avoiding the stock market, they put their money into real estate.  That drove the price of properties sky high and destroyed the concept of intelligent underwriting and evaluating the risk before approving the loan.

 
icon for podpress  Anthony Downs On Financial Reform: Play Now | Play in Popup | Download

Senate, House Versions of Financial Reform Bill Headed to Reconciliation

Monday, June 7th, 2010

Senate passes financial reform legislation; the bill now must be reconciled with the House version.  Senator Christopher Dodd (D-CT) is enjoying a big victory in his last days in the Senate following passage of broad financial reform legislation designed to rein in the excesses that caused the financial meltdown.  First, the Senate and House versions of the bill must undergo reconciliation.  Under the new law, for example, homebuyers will have to provide proof of income when applying for a mortgage.  Additionally, a new consumer protection apparatus will monitor lenders who offer subprime loans and then raise interest rates to sky-high levels.

The legislation – which will bring openness to complex financial instruments such as derivatives – passed 59 – 31 and provides a way to liquidate financial institutions once viewed as too big to fail.  It also establishes a council of regulators who will monitor threats to the economy and specific restraints on the derivatives trading, which set off the toxic debts that froze the credit markets and prompted the Federal Reserve to make trillions of dollars of loans to banks on the brink of collapse.

The vote hands President Obama his second landmark legislative victory this year, following the March passage of his historic health-care bill. “Our goal is not to punish the banks,” he said hours before the final vote, “but to protect the larger economy and the American people from the kind of upheavals that we’ve seen in the past few years.”

Senate Majority Leader Harry Reid (D-NV) summed up the legislation: “When this bill becomes law, the joyride on Wall Street will come to a screeching halt.”  The reconciled bill is expected to hit President Obama’s desk for his promised signature this summer.