Dodd Reform

After two years, Senator Christopher Dodd’s financial regulatory reform bill is finally moving out of committee to be brought to a vote on the floor of the Senate. Both the Connecticut senator and the banking committee’s ranking Republican, Richard Shelby of Alabama, appeared on NBC’s Meet the Press this Sunday to state their intentions.

Dodd reiterated his support for strong consumer protection to shield people from the supposedly predatory lending and credit card policies of big banks which “lure” their customers into borrowing money, knowing that they can’t afford to pay it back.

The responsibility, evidently, rests with business and government in this instance, not with the individual. Aside from the moral implications of his argument, the presumptuousness and paternalism of Senator Dodd was both perfectly clear and perfectly reprehensible on this subject. The purpose of the law is to protect citizens from others; not from themselves, but that is not a view shared by many lawmakers on the left.

Pressed by the moderator on the government’s role in regulating industry and the government’s effectiveness at it, both senators admitted that oversight had failed in anticipation of the 2008 meltdown and subsequent recession. But, said Shelby, “We hope they’ve learned a lot.”

Speaking on the origins of the crisis, Dodd noted that “a lot of the problems occurred in the unregulated part of our economy.” This doesn’t seem right. The trouble began with subprime mortgages to quickly extend into the entire housing market: quite probably the single most regulated sector of the American economy. On top of existing regulation and controls, that sector also had to cope with government-sponsored competition in the forms of Fannie Mae and Freddie Mac.

Dodd may have been referring to some of the exotic financial products that turned out to be quite unsavory in the long run but hedge funds and derivatives and the like amounted to only a minor segment of the financial industry. It was bad mortgages that brought down major firms and undermined the stability of the entire system. Those mortgages would not have existed in such quantity had government not for years intervened in the market for the “noble” purpose of stimulating homeownership.

Rest assured though, said Dodd: “We don’t want to so strangle a system that we can’t create jobs, have credit flow and capital form.” The best way to control an economy, after all, is by leaving just enough private business in place to prevent its total collapse.

The Dodd bill won’t kill the financial industry. It even includes some common sense provisions on how to deal with failing banks. Yet on the whole, the morality of financial reform as it is currently being considered is deeply flawed from a free-market perspective. Government should not set arbitrary limits on the size of banks. It should not dictate which products and services private enterprises may offer and provide. And it should never set out to protect its citizens against their own shortsightedness and irresponsibility. For such a government-knows-best mentality, in the end, does “strangle” a system: the one called free and civil society.