President Obama's twin goals of more bank loans and more heavy-handed regulation are in conflict with each other.
Large financial institutions, such as the ones represented at the White House on Monday, as well as smaller regional banks and credit unions, may be holding back their lending because of uncertainty — both about the economy and about what Washington is going to do.
The House bill that passed Friday would create a new Consumer Financial Protection Agency with largely undefined powers and broad jurisdiction. The bill contains a $150 billion bailout fund that would institutionalize “too big to fail” and force prudent banks to pay hefty fees to subsidize the failure of reckless ones.
This "prefunding" for the resolution bank failures are really taxes that will be passed on to consumers and investors. The bill also has arbitrary break-up authority — going beyond present antitrust law — for any institution that a financial regulator deems as “systemically dangerous.”
And both the House bill and pending Senate bills contain broad definitions of financial institutions that could include any business that offers credit, including auto dealers and retail stores with layaway plans.
The nonpartisan Congressional Budget Office finds that the bill "includes a number of intergovernmental and private-sector mandates and estimates that the mandates in the bill would "well exceed the annual threshold" established in the Unfunded Mandate Reform Act and costs hundreds of millions of dollars.
In fact the new agency would increase interest rates consumers pay by at least 160 basis points, reduce consumer borrowing by at least 2.1 percent, and reduce the net new jobs created in the economy by 4.3 percent, according to a recent paper by David S. Evans of the University of Chicago Law School and Joshua Wright of the George Mason University School of Law.
The good news is that Republicans and many freshmen and sophomore Democrats were able to include some reasonable provisions and eliminate some destructive ones.
The best provision of the House bill is the exemption of smaller public companies from Sarbanes-Oxley internal control audits. Freshman Rep. John Adler, D-N.J., introduced the provision, which garnered the limited support of the Obama administration. It would help smaller firms be less dependent on bank loans for growth by making it easier for them to go public without paying a costly price for extensive Sarbox audits that have produced little benefit for shareholders.
The House also wisely defeated the "cram-down" that would allow bankruptcy judges to abrogate mortgage contracts. If collateral in mortgages is not secure, fewer loans will be made and mortgage interest rates probably will skyrocket.
And the House fell just 15 votes short of passing an amendment by Rep. Walt Minnick, D-Idaho, that would have gutted the Consumer Financial Protection Agency and instead would have created a council of bank regulators for a more deliberative regulatory process.
If President Obama wants responsible lending and vibrant entrepreneurship, he should listen to this bipartisan coalition in the House and others interested in balancing the costs and benefits of regulation.
John Berlau blogs for Openmarket.org. He can be reached at firstname.lastname@example.org.
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