It’s Time to Fix Financial Regulations

Posted December 4, 2008 at 4:18pm

On election night, President-elect Barack Obama said, “This is a defining moment in our history.” If that is so — and I believe it is — then putting our country back on a sound economic footing is our defining challenge. Our economic crisis is the center of gravity to which all our other problems are being pulled.

For all the opportunities before us at the start of the 111th Congress, we will have been left with a terrible mess. As we learned just last week, we have officially been in recession since last December. Unemployment is rising. Incomes are stagnating. At the same time the cost of health care, housing, education and energy is skyrocketing. Meanwhile, millions of Americans are losing their homes as tens of millions more watch the value of their homes plummet.

In my home state of Connecticut, every day, some 44 families enter foreclosure; 35 of its workers lose their jobs. Countless men and women across Connecticut and the country gather around the kitchen table and ask themselves, “Will I lose my job?” “Will I be able to keep my home?” “Will I be able to provide for my family — put food on the table, send the kids to good schools, save a little for my retirement?”

Already, in the 22 months I have served as chairman of the Banking, Housing and Urban Affairs Committee, we have made important, bipartisan progress for our people. We enacted sweeping reforms to our nation’s housing sector — including important new initiatives to help families find and keep affordable homes. We wrote and passed the Emergency Economic Stabilization Act to help contain the current crisis that continues to threaten our economic stability and security. We helped reform credit card marketing and billing practices and predatory mortgage lending practices. And we passed legislation ranging from terrorism insurance and transit security to student loan reform to sanctions against Sudan and Iran.

But as the deepening problems in the auto industry remind us, our work is far from finished.

The primary legislative focus of the committee in the 111th Congress must and will be on modernizing our nation’s framework of financial regulation. Of course, we must continue our intensive oversight of the administration’s implementation of EESA and ensure taxpayer dollars are being used for the taxpayers’ benefit — reducing foreclosures, spurring new lending and reining in excessive executive compensation.

But if we are going to regain the confidence of investors, consumers and businesses here at home and around the world, we need comprehensive reform guided by several core principles:

First, regulators must be strong cops on the beat, rather than turn a blind eye to reckless lending practices. As former Federal Reserve Chairman Alan Greenspan himself conceded, it’s become clear that the markets alone cannot be entrusted to police themselves. The risks for taxpayers are just too great.

Second, we need to remove negative incentives for regulators to compete against each other for bank and thrift “clients” by weakening regulation. Regulators should not have to fear losing institutions, and thus the source of their funding, by being good cops on the beat.

Third, we need to ensure that all institutions that pose a risk to our financial system and taxpayers are carefully and sensibly supervised. This responsibility could reside with a single regulator or multiple agencies. Communication and information sharing among agencies must be improved.

Fourth, we need more transparency in the financial system — much more. We cannot afford to have trillion-dollar markets where there is little or no information about who owns or owes what. And we cannot afford to have regulators in the dark about the risks posed to and by the institutions under their watch.

Finally, and perhaps most importantly, we need to acknowledge that the failure to protect consumers is not just a moral failing — it can also cause the collapse of our largest financial institutions upon which our economy relies. Consumer protections — in the areas of mortgage and credit card lending, investor rights and other areas — should be on an equal footing with supervision that ensures the safety and soundness of our financial system.

Our goal should be nothing less than to create a 21st-century financial architecture that spurs competition and strengthens the ability of every sector of the financial industry to succeed in a competitive global marketplace.

I have great faith in American markets. With proper transparency, oversight and supervision, they are the best in the world. But if we’ve learned nothing else from this crisis it’s that government must play an appropriate role to restore confidence to them.

Regulatory modernization will be our first but by no means exclusive legislative objective. Next year, Congress is scheduled to reauthorize the surface transportation statute that can help solve some of our most pressing problems — from slow economic growth and higher gas prices to pollution and global warming. So, too, must we also closely examine the regulatory and oversight framework for new carbon markets to be established under climate change legislation expected to come before the Senate next year.

We need to focus renewed attention on the housing needs of our people. The foreclosure crisis for sure, but also the crisis in rental housing. If we can dedicate billions of dollars to propping up the nation’s largest financial institutions, surely we can help the millions of Americans who spend more than half of their income to put a roof over their families’ heads.

We will also look to reauthorize the Defense Production Act. Our military has been stretched to the limit as our men and women in uniform continue their heroic service in Iraq and Afghanistan. At the same time, our manufacturing base continues to hemorrhage jobs — including jobs in defense- related firms. The implications of these job losses on our national security are difficult to overstate. We must do all we can to reverse them.

I agree with President-elect Obama — this is a defining moment in our history. And with an ambitious agenda in the coming weeks and months, I believe the Banking Committee can help us seize it.

Sen. Chris Dodd (D-Conn.) is chairman of the Banking, Housing and Urban Affairs Committee.