"The more the state 'plans' the more difficult planning becomes for the individual."  --F.A. Hayek

BACKGROUND:

On March 15, 2010, Senator Chris Dodd (D-CT) distributed a modified version of his financial regulatory reform plan.  On March 22, the bill was approved by the Senate Banking Committee without any Republican support.  Like Rep. Barney Frank's (D-MA) proposal, H.R. 4173, the Dodd plan represents yet another assault on taxpayers and consumers by making permanent the policies used to bailout Wall Street firms, and increasing the cost of credit products.  The goal of Sen. Dodd's modified version was to win Republican support and to address the original proposal's shortcomings.  However, the changes fall far short of completing the goal. 

ISSUES OF CONCERN:

Authorizes Permanent Bailouts:  Under the Frank bill, the FDIC, without Congressional approval, would be authorized to extend endless federal guarantees and loans to financially troubled firms.  The Dodd bill also permits FDIC guarantees to be extended to the debt of large firms and expands the emergency lending powers of the Fed.  On March 19, 2010, the Wall Street Journal reported that Sheila Bair, chairman of the FDIC, stated, "[W]e do have serious concerns about other sections of the Senate draft which seem to allow the potential for backdoor bailouts through the Federal Reserve Board's emergency authority."  Both bills would increase the moral hazard by subjecting the largest firms to special regulatory requirements, implying that those firms are "too big to fail."  The Frank bill would create a $150 billion bailout fund.  The Dodd bill would create a $50 billion bailout fund.  While Frank and Dodd argue that such funds are necessary to pay the cost of winding down troubled firms, neither bill requires a failed firm to be liquidated.

Jeopardizes Safety and Soundness Regulation:  The Frank bill would create a Consumer Financial Protection Agency (CFPA), an independent agency within the executive branch.  The Dodd bill would create a Consumer Financial Protection Bureau (CFPB), an executive branch agency housed within the Federal Reserve but independent of the Fed.  Like the Democrat induced failures at Fannie and Freddie, the proposed consumer agencies would again jeopardize the safety and soundness of financial firms by separating the regulation of protecting consumers from ensuring safety and soundness.  Agencies need the ability to consider safety and soundness and consumer protection together to ensure that a balance is achieved and neither responsibility is jeopardized.  Yet, even with the recent experiences with Fannie and Freddie, the Democrats are intent on repeating their past mistakes.

Increases the Cost of Credit:  Both bills would significantly increase the cost of credit.  As the bailout funds and government created inefficiencies (e.g., the CFPA or CFPB) in the marketplace increase the cost of doing business, those costs would undoubtedly get passed on to consumers, including small businesses.  As the CBO recently noted regarding the Democrats' proposed $90 billion so-called Financial Crisis Responsibility Fee, "[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.  The cost of the proposed fee would ultimately be borne to varying degrees by an institution's customers, employees, and investors..." 

Stifles Innovation:  The proposed consumer agencies would have broad examination and enforcement authority over credit providers and all consumer financial products and services.  Simply put, both bills create product approval agencies, guaranteeing that credit providers would work to meet the demands of Washington bureaucrats, limiting the flexibility of credit providers to offer tailored products to their customers.