Click HERE for a PDF version of this position paper.

Financial Reform:  More Government, Regulation and Costs – Same Risks, Fewer Jobs  

The Financial Crisis that emerged in 2008 has greatly impacted nearly all Americans and continues to wreak havoc on our economy and individuals.  The housing market continues to struggle and credit is difficult to obtain for many people and businesses. The most recent national unemployment rate is hovering near 10% and the number of people requesting unemployment insurance continues to disappoint and frustrate policymakers. While the United States’ Economy is resilient, it is still reeling from the damage that the current recession and financial collapse has caused and the legislation that is coming out of Congress stands to add insult to injury.

What Happened?

Government policy and actions had a major role in creating the financial meltdown.  Well-meaning government policies intended to increase home ownership in poor and underserved markets, were a catalyst that helped create a disaster.  As the government pushed banks to loan to high-risk borrowers for mortgages, they also created an avenue for banks to sell those risky mortgages on the secondary market so the banks didn’t have to hold them and shoulder the risk.  Fannie Mae and Freddie Mac are both Government Sponsored Entities (GSE) that are chartered to help create liquidity in the mortgage market.  Congress pushed Fannie and Freddie to purchase these risky loans.  Both Fannie and Freddie then packaged these higher risk loans with higher quality loans and sold these mortgage-backed securities as investment vehicles. 

The ratings agencies – Moody’s, Fitch Ratings, and Standard and Poor’s – are recognized by the government as approved ratings agencies and gave these securities a top rating, as they were issued by GSE’s and assumed to have an implicit government guarantee.  These securities were very popular as they paid a good yield and were perceived to be very low risk and as such, were purchased around the globe by investment funds, individuals and other governments.  This created huge demand for these financial products leading to more and more creative financial vehicles. The Federal Reserve kept interest rates very low for a very long time, which provided tremendous liquidity and made for a significant amount of money available for loans.  Wall Street then got in on the game and created a maze of new, complex, and poorly understood financial products, while our regulators were asleep on the job, and we were off to the races.  Some financial institutions were allowed to have up to a 30:1 leverage ratio on their reserves.  This was a house of cards that was enabled, fostered and ignored by our Federal Government.  Bottom line: our government created the incentive, provided the market, guaranteed the debt, provided the liquidity and then stood back and watched it all come crashing down.  

How did your government react?

As is usual in Washington, our Congress reacts to a failure of regulation with – what else – more regulation.  Ostensibly to deal with the problems that allowed this crash to occur, a piece of legislation called the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” was passed by the House and Senate, including a “yea” vote by Congresswoman Capps, and signed by President Obama. The new law places tremendous new powers in the hands of the federal government and represents an unprecedented overreach into our economy.  This piece of legislation, H.R. 4173, is inherently flawed and while it promises to prevent another financial collapse, it actually forms the groundwork for the next one. There is no way to know how much this legislation is going to cost the American taxpayers, because it leaves the dangerous precedent of “too big to fail” companies intact, and does literally nothing to reform the agencies at the center of this mess:  Freddie Mac or Fannie Mae.  In fact, we taxpayers have at least another $400B liability with Fannie and Freddie and if history is any guide that is only the beginning.  Not only does it leave these gangrenous policies in place, it also substantially grows the size, and ultimately the power of the Federal Government – while imposing regulatory costs and burdens that will limit the growth potential of the private sector.

Among its most egregious blunders H.R. 4173 in Sections 113 and 210(n)(1) creates both a “Financial Stability Oversight Council” and a $50 billion future bailout fund. Both of these create a false sense of oversight, while concealing the basic principle that the taxpayers are, yet again, insuring the future poor decisions of financial corporations. The $50 billion “Orderly Bailout Fund” would have covered merely 58% of the Government’s $85 billion bailout of AIG. If another company of similar scope were to implode, who would pay the remaining $35 billion balance?  Look in the mirror.  It is important to note that the $50 billion comes from a tax on financial institutions, which the Congressional Budget Office (CBO) claims will be passed onto consumers – making it nothing more than yet another tax on consumers hidden as increased banking costs.   This piece of legislation will significantly drive up the compliance cost of conforming to these new rules probably beyond the reach of most local and regional banks.  Your costs of banking and borrowing will increase. 

This new Financial Oversight Stability Council has almost unlimited power to regulate non-bank financial organizations and the rules are vague and highly arbitrary. This new organization will inhibit growth and innovation because their goal is to avoid economic disruptions, not encourage economic growth.  There is very little real oversight of this massive intrusion into financial system.  Giving the Federal Government unchecked ability to arbitrarily seize and break up financial institutions when they have proven incapable of overseeing what they are supposed to oversee now makes little sense.  The arbitrary application of government power is what is known as Tyranny and this system will inevitably succumb to political interference to punish enemies and reward friends.   This bill basically gives the federal government the unchecked power to run our financial system.

This is Crony Capitalism at its worst.  Far from preventing more bailouts this law again gives the Fed unlimited ability to lend as much money as needed to financial “sectors”.  They will socialize the risk (“too big to fail”) with us taxpayers and privatize the profits in the banks.   These banks help buy and market the massive government debt we are accumulating, do what they are told and Uncle Sam will make sure they don’t fail.  The key point to grasp is that these 2000+ pages of financial regulation have more to do with Washington’s needs than a genuine need to reform the financial system. 

These institutions that are protected and ones that want to be protected are all future campaign contributors.  They will all donate to our Congressional representatives, and pay former members of Congress who are now paid lobbyists to protect them.  We are all being played for stooges, and all in the name of protecting us from ourselves.   There is no excuse for this corruption.  None.  This is the stuff of a Banana Republic, not the United States of America.

This law creates an array of new oversight and regulatory bodies such as the Office of Investor Advocate, the Bureau of Consumer Protection, the Federal Insurance Office, new regulation of Investment Advisors, making sure any gold you buy is “Conflict Free”, new monitoring of hiring practices in financial institutions, and on and on.  All groups that will no doubt operate with the same efficiency of the Post Office and your local DMV and all to protect us from ourselves.

Unfortunately, all of this is not the end of this destructive piece of legislation.  As a practical matter:  all net new jobs in this country are created by start-up companies.  “Angel Investment” is money invested in start-up companies from private investors or certain venture capitalists. Typically, these Angel investors come in the form of local “rich” individuals and friends and family. These start-up companies are credited with creating many, many thousands of jobs annually – with no cost to the American taxpayer.  Start-ups are what made California what it is.  Intel, Apple, Oracle, eBay, Kinko’s, Google and countless other entrepreneurial companies have created untold wealth and spawned countless other companies that create nearly all self-sustaining new jobs in our country and our state.    Some estimates place 60% of the Nation’s “angel investment” within California. Companies like mine are created every year with nothing more than some minimal investment capital and an idea. Angel investments are crucial to businesses like mine and under this new law start-ups will find it more difficult to raise seed capital as they increased the qualifications for investors.  How does this help create jobs or grow our economy?   

What did any of this new start-up regulation have to do with the financial meltdown?  Answer:  Nothing.  Why are we making it harder to start new promising companies?  This makes zero sense, yet Rep. Capps did not object, did not offer amendments, and did not guard the interests of her constituents in the entrepreneurial community that creates most new private sector jobs in her district.  Just a “yea” vote to make it all more difficult for you and your children to prosper.   

This sad tale could continue and more examples of ill-considered legislative abuse of the American taxpayer could be detailed but hopefully the point is made.  This law will not do what it promises, will increase your banking costs, will make it more difficult to borrow, will reduce your financial choices, stifle financial innovation, reduce economic growth, does not deal with the key existing risk factors and will make it more difficult to start a company. So Mrs. Lincoln, other than that, how did you like the play?

A Better Path

Once elected to Congress I promise to hold steadfastly to the following core principles when dealing with financial policy issues:

                Free Market Entrepreneurial Capitalism – The United States Economy was built on the  principles of free market entrepreneurial capitalism and that is what we need to return to. If someone is willing to make extremely risky investments, based upon the chance to receive large returns, then they should be able to – they don’t need our government to monitor their financial decisions. Our Nation was founded on taking risks and the continued success of our Nation depends on people making educated decisions and taking their own considered risks. Risks and rewards are fundamental to our economy and we, as a people, should not bailout companies or organizations if they have made poor financial decisions – no one is too big to fail.  If a company is too big to fail then it is too big.  Rewarding failure and socializing risk while privatizing profit is not going to make our country stronger.

                Encourage Investment and Risk Taking – Risk capital and start-up investing is a large part of what drives small businesses across the United States and nowhere is that more apparent than here in California. Waiting 120 days for a start-up company to receive its funding will be a premature death sentence to many, if those companies’ angel investors can even get past the new financial filing requirements put forth in Sections 412 and 413 of the bill. It is no surprise to me that small businesses like mine create jobs. In fact, small businesses represent over 90% of the jobs Americans hold, across the Nation. It is unnerving to read H.R. 4173’s added regulations to an already over-regulated California. Approximately $500 billion each year is lost due to regulation in California. We need to be giving small businesses the tools to grow, not driving their costs up and putting them out of business.

                Consumer Financial Protection – the best consumer financial protection someone can receive is from themselves. People should take charge of their finances and make sound decisions based on all of the information they are presented with. The Constitution does not afford the Federal Government the right to tell its citizens how they should invest their money or which investments are too risky for them. Adding another regulatory body that does not have a mandate of power is not only dangerous, but it also shows a severe lack of Congressional responsibility. Not to mention the fact that it is going to cost the American people an additional $450-850 billion ANNUALLY.

What steps should have been taken to prevent another financial panic?  Had the Federal Government actually enforced their existing regulations and listened to the scores of people telling them to reign in Fannie and Freddie, this crisis would have never occurred.  There is no need to perform a wholesale regulatory overhaul on our system, there are simple and free changes that could have been made that would prevent such a meltdown to occur again.  Specifically:

Increase reserve requirements at banks – Reserve requirements for should be revised for certain banks.  Some of the investment banks had leverage ratios of 30:1 on their capital reserves.  Traditional banks had a leverage ratio of about 10:1.  This simple change would help prevent banks from overleveraging in any asset class and help prevent investment bubbles from forming.

Allow the market to work – Allowing financial institutions to fail is as important as allowing them to succeed.  The practice of institutionalizing “too big to fail” is a recipe for another financial collapse.  In our dynamic economy, companies are constantly formed while others fail as the market always seeks the most efficient allocation of capital.  That is what made this country the success that it is, let it continue to work.  There will be failures but overall our country will continue to be an engine of growth and prosperity and will guarantee our children a better standard of living.  Remember who created the conditions of our current problems:  Washington.  Don’t give them more power over our lives.

Remove Fannie and Freddie from Taxpayer Life Support --  The two entities who really enabled the crisis to precipitate are still sucking in taxpayer dollars like a vampire.  They both need to be privatized completely and set free.  No more support and no more preferential rate treatment on borrowing.  They need to sink or swim on their own merit, if not we taxpayers will be funding these organizations in perpetuity.  Let the private market develop and operate the secondary mortgage market.  The government should not be involved.  

The Frank--Dodd law should be repealed, it will do more harm than good and is a massive and unprecedented expansion of Federal Government powers.  When it comes down to it, this legislation is nothing more than a power-grab disguised as a needed reform in the financial sector of our economy. People should be allowed to make their own financial decisions – based on simple, easy to understand explanations. It is not the Constitutional responsibility or province of the Federal Government to make sure that you and I make sound fiscal decisions – or to bail us out if we make poor ones. Yet again we can see the pattern of arrogance emerge of Washington insiders like Congresswoman Capps who think that they know what’s best for the American People. That the Government knows best. They’re mistaken and need to be reminded who they work for. This is yet another piece of legislation that Mrs. Capps has voted for that is going to raise taxes, increase the size of Government, and increase costs.  Help send her that reminder this November, and remember – you cannot change Congress without changing your Congresswoman.     

Click HERE for a PDF version of this position paper.