By
Chris Buchheit on August 14, 2010
In an ongoing discussion of the recent financial reform bill, I will address another aspect of the new law. Today, I assess the bill’s ability to address the problems that led to the financial recession we are still in.
As a background, what did actually cause the recession?
The financial crisis was primarily caused by risky and faulty business behavior. However, as I’ve written before, part of the reason some businesses partook in these practices was because the federal government promised to reimburse banks that lent money to those who had no ability to repay. Thus, through Fannie Mae and Freddie Mac, these banks had the security to lend as they pleased.
Once lendees were unable to pay the banks back, the housing market was demolished, and so were the banks. The lesson? Banks only need to lend money to those who can afford to pay bank the loans.
So what does the new financial bill have to do with this situation? Surprisingly, nothing.
According to the website I cited in my last blog, the financial bill does nothing to address the Fannie Mae and Freddie Mac lending practices situation. I believe this is a great oversight, to say the least, and other critics of the bill hold the same opinion. “Rather than fix the endless bailout that Fannie and Freddie have become, Congress believes it is more important to expand federal regulation and litigation to lenders that had nothing to do with the crisis,” writes Mark Calabria, director of financial regulation studies at the Cato Institute, in his analysis of the bill.
Although the bill requires banks to check lendees’ income levels and assess their ability to pay back the loans (which banks were supposed to do anyway), I believe it’s too little too late. The government should have been focused on fixing the source of the problem. However, it chose to attack wall street and individual banks. In short, I believe this bill is far more political than it is functional.
On the other hand, perhaps the bill is a step in the right direction. Maybe it will set the discussion in motion to consider real solutions. What do you think? Leave me comments!