Debt Fast Track

Financial Reform is needed, just not this version

I thought much of President Obama’s speech today pushing the Dodd financial reform package was spot on. We do need more transparency in the fine print of financial institutions. We also need more clarity in guidelines and regulations. When he told us that executives should not receive high bonuses when they are taking taxpayer dollars, this also rung true. I was waiting for just one confession that once again never came. All of the politicians on each side of the isle are eager to point to business and consumer factors related to the financial meltdown. However, with a few exceptions, Washington is not eager to review or highlight how they were a part of the problem.

Let me just give one simple example. President Obama pointed to risky bank lending products as a leading contributor to our financial mess. It was a huge issue, and probably the single biggest harbinger of our current financial metldown. He blamed the banks for creating these products, and even allowed that some consumers signed up for payments that they knew they could not afford. The argument was that the banks were simply greedy in their attempt to create products that did not make sense. While the banking industry is not blameless by any stretch, they are not in the business of taking on excessive risk. In a large part, they were forced to take on excessive risk by the government.

Banks have long been required to gather and track HMDA data. In short, this tracks the gender and race of the people that qualified for mortgage loans. What the HMDA data showed, was that minorities by and large did not qualify for the same conventional loans that white families did.

The immediate reaction in Washington, of course, was that there were racist practices happening in the lending industry. Frankly, the politicians understood that this was largely not the case. Of course, there are instances of blatant racism, but in this case most of the issue was due to some minority demographics simply having lower credit scores and income to qualify. They ignored the fact that some minorities were actually more qualified than the white poputation. One could successfully argue that the reason for the lower credit scores and incomes are due to racism. However, the government chose to remedy the problem by making banks create risky products in order to maintain favored status with the FED. Rather than address issues that would bring credit scores and incomes up, they created nonsense products that would require higher risk and a greater exposure to foreclosure.

The subprime mortgage industry grew from a directive from the government to create risky loan products. Consumers, both white and minorities started enjoying unprecedented access to large sums of money that they simply had no basis to pay back. It was really no surprise that this method of solving a real problem failed. Government and the industry rushed to address a symptom, rather than the illness, and in the process allowed the decease to grow.

Now, Chris Dodd and President Obama are once again trying to force a 1,300 page bill down the throats of congress. They use emotional sound bites assuring the American public that this is 1,300 pages worth of common sense legislation. I only wish this were true. However, having read a portion of the proposal, sadly it is not. I will address specific issues in future blog posts, but for now, do not be fooled by the political rhetoric. This bill has the potential to further harm our financial institutions in very significant ways.