Obama Signs HR 4173, Cause of Next Financial Crash

Today, President Obama signed HR 4173, the Wall Street Reform & Consumer Protection Act, also known as the Dodd-Frank bill. The next crash we face in the financial markets will directly be caused by this new set of laws. I guarantee it.

It comes as no surprise that Senator Chris Dodd and Representative Barney Frank are the architects of this new scheme to distort the financial and mortgage markets. After all, it has been a recurring theme in their careers.

So what kind of reform are we actually getting from this bill? None. We are getting more of the same-ol' same-ol' that caused the mortgage meltdown. HR 4173 didn't roll back federal mandates to lend to those who may not be able to afford their mortgage. HR 4173 didn't do away with lending quotas. This is all in spite of recognizing these reasons as the cause of the financial crisis we are in.

The real solution would have been to end the endless bailout that we call Fannie Mae and Freddie Mac. Had it not been for these quasi-corporations backed by the United States Treasury, the vast majority of loans that contributed directly to the crisis would not have been made. Lenders received incentives from the federal government to make loans to unqualified borrowers and had their risk mitigated by the perpetual promise that Fannie Mae and Freddie Mac would be there to pick up the tab.

Another large contributor to the financial crisis was the Federal Reserve itself. Because its policy is centered on short-term borrowing, the spread between short-term and long-term borrowing grew astronomically. This presented a very enticing incentive for people to borrow short. This created the adjustable rate mortgage, where the borrower's loan would reset to current interest rates after a set period of time. This provided an opportunity for banks to do what any business should do: make a profit. In this scenario, the banks had the incentive to push this type of loan to the borrower because of the enormous profit potential from the yield curve. If it looked like the borrower wouldn't be able to make the new payments, then there was a buyer named Uncle Sam. It was a win-win situation.

Two things should have been done to truly protect the consumer. First, the bill should have lifted the ban on the Government Accountability Office from auditing the Federal Reserve. By doing so, the American People (and hopefully Congress, but I doubt their abilities) would have become more educated on how the private company that controls the national economy actually works.

Secondly, this bill should have put an end to the government's preferential treatment of debt. Think about it for a minute. You pay taxes on your equity. You can get tax incentives for your debt. For nearly three years, you were essentially being paid to borrow money. Just think about it.

So what does this bill do about the failure of bank regulators to do their job? Well, it eliminates the Office of Thrift Supervision. Or does it? The press releases say so, but what actually takes place suggests otherwise.

Frank claimed that the current regulators lack credibility and have a terrible record of consumer protection, and that's why they are being transferred from the Office of Thrift Supervision to the Office of the Comptroller of the Currency or the FDIC (Section 322 of HR 4173). Talk about job security! Seriously, they lack credibility and have a terrible record but get to keep their jobs (just under a new "Office").