Financial “Reform” Fails to Address Root Causes of Crisis: Fannie, Freddie, the Fed, and Congress

By Bill Wilson

As the Senate begins debate on Senator Chris Dodd’s (D-CT) financial “reform” bill, what is missing from the bill is nearly as bad as what it contains.

First, a brief examination of some of its key provisions is obliged: as reported by NPLC.org, it creates a Financial Stability Oversight Council to put into receivership — i.e. take over — any financial institution it deems "too risky"; it puts the Federal Reserve in charge of a Consumer Financial Protection Bureau with sweeping powers to regulate any institution with a portfolio exceeding $10 billion; it creates a permanent revolving $50 billion bailout fund; and “[u]pon a consensus by the Fed, the Treasury Department and Federal Deposit Insurance Corporation (FDIC), unstable institutions would be turned over to the FDIC.”

In short, the legislation is an extensive takeover of the nation’s entire financial system; a classic case of the “cure” being worse than the disease. Namely, because it fails to address the root causes of the financial collapse of 2007 and 2008. Instead, it barely treats the symptoms of the problems — all of which government created.

For example, the bill neither repeals the Community Reinvestment Act nor the Clinton-era regulations that executed it forcing banks to offer mortgages to lower-income Americans. This essential weakening of credit was hailed at the time by then-HUD Director Andrew Cuomo as an end to “discrimination in lending,” but we now know was one of the principal causes of Americans receiving mortgages they could never afford.

Last year alone, there were 3.9 million foreclosure filings, as reported by Business Week, surpassing 2008’s 3.2 million foreclosures. And the pain is hardly over yet. RealtyTrac Senior Vice President Rick Sharga and Trulia CEO Pete Flint forecast as many as 4 million foreclosures in 2010.

In the meantime, since the crisis began, all of government’s energies have been spent attempting to “loosen” credit: the Federal Funds Rate that banks borrow from one another is at 0 to 0.25 percent and the Federal Reserve has more than doubled the money supply since 2007.

Which brings us to the Federal Reserve’s easy money policies.

Get full story here.