News Archive 2009-2018

Larry Lindsey ’76: Haste Makes Waste in Financial Regulatory Bill Archives

In the first of what will be periodic contributions to the Bowdoin Daily Sun on the economy, Larry Lindsey ’76 describes a bill and a legislative process that leaves something to be desired.

The Congressional Conference Committee worked all night on Friday, June 25, finally quitting at 5:37 in the morning, so that President Obama could go to the G-20 Summit in Canada saying that Congress had finished a bill. Throughout the night comments were penciled in on the 2,315-page bill, so many in fact that the committee staff ran out of paper. It took 36 hours to put everything together in a typed version that was released on Sunday night. Having pulled some similar all-nighters at Bowdoin on decidedly shorter and less momentous documents, I can only shudder at the final work product.

It was no surprise then that things began to unravel when the document saw the light of day. The big problem was a development that happened at 3:00 in the morning on that fateful night. To make it work, the committee had to come up with $19 billion to pay for some of the “special provisions” in the bill. There weren’t any tax experts around on the committee, so they had decided to give a group of unelected officials the power to set both the size of the tax base and the rate that would be applied on a taxpayer-by-taxpayer basis to a target group of financial service companies. Not since the Sheriff of Nottingham has a tax collector had such discretion on who to tax and how much.

Needless to say, when it was discovered this caused such a ruckus that the bill would have failed.  So the conferees got back together and changed that provision. Trouble was, in the intervening 24-hours, lots of other provisions with serious problems cropped up. The most notorious was the provision dealing with derivatives. It was so bad that even the author of the provision, Senator Blanche Lincoln of Arkansas, announced that she could not sign off on the bill. But pulling the bill at this stage would have proved too embarrassing, so Senator Dodd and Congressmen Frank announced that they would have to begin work on a “corrections” bill as soon as the bill that they had just finished was passed.  Note this is not a “technical corrections” bill which Congress uses a lot because a few words here or there are wrong-there are so many errors in this bill that the changes cease being “technical.”

Unfortunately, there are a lot of substantive problems with the bill that won’t be changed. The bill is a stapled together version of a lot of different ideas”“some good, some terrible. But as a result it has no coherence. Different sections work at cross purposes and everyone who has taken a serious look at the bill agrees that it will mean that the current contraction in bank credit is likely to continue a bit longer.

Start with the biggest of big pictures. The main concern that resulted from the recent financial crisis was systemic risk. That is, when one bank runs into trouble, it has the effect of dragging other banks with whom it does business, down as well. Everyone agrees that something has to be done to mitigate it and the bill creates a series of regulatory councils and rules to do so.

But then Congress also wanted to be able to claim that there would be no taxpayer bailouts. So it created a special fund to be financed by large financial companies-banks, insurance companies, other finance companies-to pick up the bill. Forget for the moment that these companies, their shareholders, depositors, and policy holders are also taxpayers. What the bill does when one bank gets into trouble is to tax the capital of all the other banks and financial institutions with which it does business. In other words, the bill hardwires systemic risk.

Then, with regard to housing, the bill creates what its authors describe as “a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.” This sounds good on the surface. Of course, for the last two decades Congress has been mandating the exact opposite-creating preferential federal standards and mandates for a wide variety of home loans under the Community Reinvestment Act and the various federal agencies like Fannie Mae, Freddie Mac, FHA, and some of the divisions of HUD. Those preferential standards were created to find a way that people who could not qualify for or repay a standard mortgage could qualify. Since all of these special mortgages now underpin the housing market in a variety of areas (ranging from inner cities to depressed rural areas to high priced areas like Southern California that rely on adjustable rate mortgages, many with teaser rates), the bill is likely to disrupt funding of mortgages for these areas, and by not fixing Fannie Mae and Freddie Mac, leaves one of the biggest sources of systemic risk unfixed.

Going further, the bill creates a super-regulatory agency that is not subject to any oversight by either the authorizing or appropriating committees of Congress. The agency is instructed to collect data on every transaction done by every customer-including ATM withdrawals-match that with racial and ethnic data to do a racial and ethnic profiling of all the bank customers in the country! This is such an extreme idea one can’t make it up.

The 2,315 pages contain literally dozens of these types of provisions. It shows the kind of work product that comes out when Congress tries to meet an artificial deadline. The same thing happened last February with the stimulus bill-which “had to be done” by Presidents’ Day. The result was $900 billion of added debt and deficits with very little stimulus or job creation to show for it. Like with this bill, a “last minute” addition authorized the payment of bonuses to the executives of the failed AIG. So embarrassed were the authors that they all claimed they had no idea how this provision was “magically” slipped into the bill. Then there was the health care reform bill which, we have now learned, generated regulations that will end half of all the employer provided health insurance programs in the country by 2013. There is justice. Another provision that no one noticed may force Congress off the very generous Federal Employees plan and onto the “Exchanges” they designed for everyone else. Congress and their staffs are worried and are busy finding a way to slip some provision in somewhere so they can keep what they have.

There is still hope for the financial regulatory bill. If the bill cannot get to the sixty vote hurdle in the Senate, the Conference Committee will have to come back, take its time, and get things right. They can work over the summer-and not at 3:00 in the morning. Maine’s two senators, Olympia Snowe and Susan Collins, are key to making this happen. It’s an old Maine saying that haste makes waste. We should abide by it-especially when the nation’s financial health is at risk.


Larry Lindsey is president and CEO of The Lindsey Group, an economic advisory firm based in Washington, D.C., that  focuses on global macroeconomic trends and events that significantly influence the performance of major economies and their financial markets. He previously served as Assistant to the President and Director of the National Economic Council at the White House and as the chief economic adviser to candidate George W. Bush during the 2000 presidential campaign.

Dr. Lindsey also served as a Governor of the Federal Reserve System from 1991 to 1997, as Special Assistant to the President for Domestic Economic Policy during the first Bush Administration, and as Senior Staff Economist for Tax Policy at the Council of Economic Advisers during President Reagan’s first term. He served for five years on the economics faculty of Harvard University and held the Arthur F. Burns Chair for Economic Research at the American Enterprise Institute. From 1997 until 2001 he was Managing Director of Economic Strategies, a global consulting firm.

Dr. Lindsey earned his undergraduate degree magna cum laude at Bowdoin and his master’s degree and doctorate at Harvard. He was awarded the Outstanding Doctoral Dissertation Award by the National Tax Association and was named the Citicorp Wriston Fellow for Economic Research at the Manhattan Institute. He is the author of numerous articles and three books: The Growth Experiment, Economic Puppet Masters, and What a President Should Know…but Most Learn Too Late.

2 thoughts on “Larry Lindsey ’76: Haste Makes Waste in Financial Regulatory Bill

  1. Dale Tomlinson

    I am sure Dr. Lindsey knows his subject, and have to agree with many of his points. However, the statement, “…a special fund to be financed by large financial companies—banks, insurance companies, other finance companies—to pick up the bill. Forget for the moment that these companies, their shareholders, depositors, and policy holders are also taxpayers.”, glosses over the point that shareholders, depositors, and policy-holders all have a choice: stay with the big company or move to a smaller one not subject to the tax. If the tax is indeed that onerous — which I do not believe — all of these people can “vote with their feet”, as Reagan said; this will actually have the effect of making the big institution smaller, which will be better for all of us.

    Also, the bill does not “…tax the capital of all the other banks and financial institutions with which it does business” when one bank gets into trouble, but does so on a predictable, continuing basis before any trouble arises. The tax — again, if it is really a strain on the banks who pay it — will presumably take note of risky practices of fellow banks and exert pressure on them to rein in those practices, if only to avoid a downturn and the possibility of an increased tax. The longer it is unspent and seen as unneeded, the better chance that the banks will get a refund in the future; they know as well as I that none of these policies are written in stone.

  2. James

    Conservatives are fond of using the length and complexity of legislation as a general indictment of any bill and of Government in general, but it is the inevitable result of the legislative process. As anyone – doubtless there are many others, in addition to Larry – who has participated in legislative process can attest, it is a messy process because of the need to balance competing interests outside of a market context, and a bill would NEVER be completed without a deadline. Skeptics should rejoice that legislation is not easy or there would be more of it – but I think it is unfair to blame any bill for being long and complex, and it is disingenuous to say – as the right often does – we support this bill in concept but we just need simpler language, more time, and more participation by our side of the aisle. They are really saying – “kill it!”

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