Bush dresses deregulation wolf in sheep's clothing: Financial market oversight scheme doesn't fit the real problems

Citizens in Las Vegas, NV watching their home prices plummet and the number of vacant properties in their neighborhoods increase (and thus cause prices to drop even more) may well want to keep some questions in mind as the President promotes his actually not-so-dramatic plan for solving the mortgage meltdown mess. [WaPo] Evidently it’s enough to say that the proposal is “very comprehensive in its potential impact” to get GOP hearts aflutter – most Americans may want more.

The proposal hinges on three moves: (1) Create a new agency to regulate banks (supposedly combining the five agencies that currently have some level of jurisdiction including the OTS); (2) Create an agency to oversee consumer protection and business practices; and (3) Give the Fed vague new powers to ‘oversee’ the practices if they threaten financial market security. [WaPo] According to the Post, the big loser would be the Securities and Exchange Commission which would be “streamlined” in combination with the Commodity Futures Trading Commission. The SEC “would be asked to give financial markets greater freedom to police themselves and streamline the process for approving financial products such as complex futures contacts.” [WaPo] (emphasis added)

Question One: If we take the President at his word that this comprehensive regulation revision has been an on going process, then can we safely assume that this is the plan that’s been knocking around inside the Bush Administration for at least a year to limit the Federal government’s role in the regulation of Wall Street? [NYT] Unless the proposal changes dramatically prior to the President’s roll out – the answer to that question is YES.

Here’s the New York Time’s take on the overall scheme: “Although the proposal would impose the first regulation of hedge funds and private equity funds, that oversight would have a light touch, enabling the government to do little beyond collecting information — except in times of crisis.” [NYT]

Collecting information is all well and good, but nothing is gained by warehousing information that cannot be acted upon. There is a Katrina-Response tinge to this thinking: it was all well and good to have studies about the structural viability of the levees, but without pro-active policies the actions necessary to prevent flooding were never taken. To merely accumulate data without being able to act BEFORE a situation becomes a crisis only serves to justify charges that the government knew of problems and failed to act upon relevant information.

Question Two: Does the Bush Administration Plan address the causal factors in the latest financial meltdown? Once more, if the plan is as publicized, the answer is NO.

Again, from the New York Times: “The regulatory umbrella created in the 1930s would grow wider, with power concentrated in fewer agencies. But that authority would be limited, doing virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis.” (emphasis added)

Combining the Bush Administration’s first tenet (limiting the role of the federal government in the oversight of financial markets and hoping that the industry will regulate itself) is combined with the second piece (nothing in the proposal will deal with CDOs, ABVs, and SIVs) then what the Administration appears to be advocating is that the Federal government will actually do less in overall regulatory terms, and nothing about overseeing the very investment paper that got us into this mess in the first place.

Question Three: Could the Federal Reserve use its authority to prevent future excesses by investment banks and other financial entities to mitigate the probability of future situations as those we are now facing? The answer is – probably not.

“…the Fed would not be able to act simply because one bank or brokerage house was taking excessive risk. Instead, the Fed’s “authority to require correction actions should be limited to instances where overall financial market stability was threatened,” the proposal states.” [NYT]

Translation: Until or unless there is another financial meltdown the Federal Reserve would be powerless to take action. The Fed would have to wait until the situation was so bad that “overall financial market stability was threatened.” The most common simile that comes to mind is that this would be like closing the barn door after the horse got out.

Not only might the horse leave the barn, but under this scheme it might also keep on galloping. “Under the Treasury proposal, while the Fed would have some authority to stop financial institutions from taking on too much risk through the use of exotic financial instruments, it appears that little would be done to limit the flow of such new products.” [NYT] It was, in fact, the flow of these “exotic instruments” that precipitated the current problems. Nothing in the President’s not-so-bold-new plan addresses the oversight of how this paper gets bought and sold. In short, neither the risk taking by financial institutions, nor their propensity to off-load paper on one another, would be limited by much of anything other than the industry’s willingness to police itself.

Some critics may judge the plan by the nature of its most vocal supporters. The CEO of the International Swaps and Derivatives Association likes it, as do some in the hedge fund management circles. [NYT]

This kind of proposal is almost a classic Bushian operation – have a preconceived agenda, wait for a crisis, and then roll out the Dramatic New Plan To Save the Nation underpinned by the original preconceived agenda, then level criticism on those who oppose the proposals as being “unwilling to act in a time of crisis.” We have too many examples of this process to be unwitting recipients of Bushian received wisdom any longer. The administration wanted to over-ride the Davis-Bacon Act so when Katrina hit one of the first actions taken by the Bush Administration was to waive the act’s provisions. The administration wanted to conduct domestic spying, so plans that were already in the offing were incorporated into the NSA domestic surveillance program mere weeks after the attacks in 2001. The administration wanted to diminish the role of public employee unions, so when the Department of Homeland Security was structured employees who had enjoyed union protections were divested of those under the new organization. As the nation stumbles through financial uncertainty – what better time for the Bush Administration to roll out its financial market de-regulation plan?

In all likelihood we’ll discover that the Bush Administration, no lovers of wolves, has dressed up the De-Regulation Wolf in Comprehensive Reform Sheep’s Clothing – grandmas and other taxpayers should not be fooled.