Financial Reform

Professors Give Failing Marks to Democrats Financial Reform Bill

College students know better than anyone the importance of listening to your professor. OK, given that most of us have laptops and iPhones, maybe we’re the last people you should ask. But still, what the professor says can sometimes be the difference between an A and a C. Recently some academics got together to grade the Democrats’s financial reform legislation. Their final marks? Well, let’s just say, it looks like the bill could be another low grade on an already poor report card.

Whereas a low grade for a college student may mean taking some easier courses to pull up the GPA, for the Democrats’ reform legislation, it could mean that the nation could lapse into another major crisis. As the New York Times reports,

As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis.

Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market, including the future of the housing finance companies Fannie Mae and Freddie Mac.

Others simply argue that it is premature to pass sweeping legislation while so much about the crisis remains unclear and so many inquiries are in progress.

“Until we understand what the causes were, we may be implementing ineffective and even counterproductive reforms,” said Andrew W. Lo, a finance professor at the Massachusetts Institute of Technology. “I understand the need for action. I understand the need for something to be done. But what I expect from political leaders is for them to demonstrate leadership in telling the public that we need to proceed about this in a much more deliberate and rational and thoughtful way.”

The problem is that patience has gone out the window. Democrats have taken a kamikaze approach to passing their agenda – introduce an idea, pump out a few positive sounding (if ultimately misleading) talking points, rush it through Congress using their big majorities, and then run an election strategy around “look how much we accomplished.”

Health care is the primary example. Democrats sensed a winning political issue that would appeal to everyone incensed by ever increasing health care premiums. They then trumped up their bill’s ability to bend the cost curve downwards, preserve Medicare, and change the way medicine is delivered. The bill zoomed through the House before anyone knew what happened and then faced a hard fought battle in the Senate before ultimately being passed using reconciliation. But as Nancy Pelosi now (in)famously said “we have to pass the bill so that you can find out what is in it.” She turned out to be exactly right. After passage we found out that companies were going to have to pay billions to comply with the new laws provisions, we found out from the Center for Medicare and Medicaid Services that the bill was actually going to increase the cost of health care more than if we had done nothing, and we found out from the CBO that many hospitals would stop treating Medicare patients if the planned cuts were imposed.

Unwilling to learn from their mistakes, Democrats are now taking the same pedal-to-the-metal approach to passing financial regulatory reform. The results will be just as flawed. For instance, consider the concerns of these professors, as compiled by the New York Times:

  • Andrew W. Lo, a finance professor at the Massachusetts Institute of Technology says that “until we understand what the causes were, we may be implementing ineffectiveand even counterproductive reforms.”
  • Gary B. Gorton, a finance professor at Yale, said the financial system would remain vulnerable to panics because the legislation would not improve the reliability of the markets where lenders get money . . . “It is unfortunate if we end up repeating history,” Professor Gorton said. “It’s basically tragic that we can’t understand the importance of this issue.”
  • David A. Skeel Jr., a corporate law professor at the University of Pennsylvania, said it would be a mistake for Congress to leave the drafting of these standards to the discretion of regulators.
  • Lawrence J. White, a finance professor at New York University, said it made no sense to overhaul financial regulation without addressing the future of federal housing policy. He said he was trying to find the strongest possible words to describe the omission of Fannie Mae and Freddie Mac from the legislation.“It’s outrageous,” he finally said.

It is important to get something done, but it is more important to get it right. Democrats want to claim that they are “the party of results,” but if those results don’t lower health care costs or prevent another financial collapse, what do they really have to show? The problem is that they see the trouble that lies ahead in November. Facing down the barrel of a brutal election season has led Democrats to make some bad decisions in the name of trying to find something (anything) to run on. The public wants real reform. They don’t want a slapdash mixture of provisions that fails to address the underlying problems that led to the reform conversations in the first place.

Democrats seem determined to push this flawed financial reform bill despite its failing marks from professors. If the reforms wouldn’t pass in college, Democrats shouldn’t let it pass through Congress.

by Brandon Greife, Political Director of the College Republican National Committee

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