Financial Regulatory Reform

According to the New York Times the debate continues on the issue of financial regulatory reform. Currently legislators are planning on creating a Consumer Protection Agency to protect consumers against abusive terms on mortgages, credit card debt, and other financial products. This agency will either become a part of the Federal Reserve or will be created as an entirely new agency. While financial regulation is a good idea to keep banks and financial institutions from misrepresenting their assets and debts what is continually misunderstood by lawmakers is the cause of irresponsible lending practices. Government backing and sponsorship of many financial institutions has taken away any accountability or risk in trading and lending. With implicit or explicit government guarantees against failure banks and other financial institutions are able to lend in extraordinarily risky ways without the risk of failure causing them to over leverage and lend to people who have little chance of repaying their loans. Increased regulation is not the answer to making banks resistant to risky lending and trading practices, the re-introduction of risk into these practices is. What the government needs to do is threefold, firstly we must stop bailing out banks and other financial institutions this has caused a dangerous precedent wherein banks can attempt to maximize profits by making risky loan decisions and then when the loans are defaulted on they are bailed out by the taxpayer. If the bank is threatened with closure and the executives threatened with a loss of their livelihoods they will be much more responsible in deciding who to loan to. We need to abolish the FDIC, most people understand the FDIC as an entity that protects consumers from bank failures but what it is really doing is protecting the banks from failure. Bank deposits are essentially loans to the bank and by guaranteeing the repayment of these loans the government is allowing banks to again make risky investment decisions with little risk. If banks were not guaranteed by the government consumers would be encouraged to shop around much more and only deposit their money in banks with sound lending practices. Finally, we need to stop guaranteeing loans via Fanny Mae and Freddie Mac. The reasons for this are explained in more detail in my blog on Fannie and Freddie which can be found further down on this page. To conclude, as with many other things that are wrong with the American economy today, we do not need to introduce new government regulation we need to reintroduce market forces to our economy and hold people accountable for their actions.