What I Think About Financial Reform
By Arnold Kling
My instinct is to call the proposed legislation a “blame deflection bill” rather than financial reform. But I admit that I have not read the whole bill. Has anyone?
My impression is that the following things are not in it.
1. No exit strategy from government support for subsidized, lenient mortgage credit. No curbs on Freddie and Fannie, whose market share has skyrocketed in the past year and a half. No increase in down payment requirements for FHA, which is in deep doo-doo.
2. No change to the role of credit rating agencies, as far as I know. It seems to me that one thing that everyone, left and right, can agree on is that the regulators outsourced their function to the credit rating agencies, and this worked out badly. As far as I know, the bill does not correct this flaw. Perhaps it tries to, but other provisions have gotten more attention.
3. Nothing to address the issue of “cognitive capture.” The regulators will still get their analysis of the financial sector from the CEO’s of the largest banks.
Finally–and this will get me in big trouble–I have to rant about the notion of a consumer financial protection agency. I know that it’s axiomatic that poor people are helpless victims. But in the case of these mortgages, that is a really hard sell. The banks did not take from poor people. They gave to poor people. If you were lucky enough to get one of these exotic mortgages when house prices were still going up, then you got to reap a nice profit on your house. If you were not so lucky, you lost…close to nothing. I’m sorry, but if you borrowed up to 100 percent of the value of the house or more, then all you really lost were your moving expenses.
What about predatory lending? As I understand it, the idea of predatory lending is to saddle the borrower with an expensive mortgage so that you can foreclose on the property and sell it at a profit. How many times did that happen? Have you read of a single instance in the past three years where the bank made a profit on a foreclosure?
I am always ready to feel sorry for poor people because of their poverty. But I cannot feel sorry for somebody who was given a basically free option on a house and the option didn’t happen to come into the money.
The reason that those of us on the right are left somewhat speechless by the financial reform bill is that it seems to us to be based on premises that strike us as preposterous.