FinReg Will Be 'Disastrous' for Economy: FCIC's Wallison

The Wall Street Reform bill, an overhaul of US financial rules that won final approval in the Senate on Thursday, will be “disastrous” for the US economy and will slow economic growth permanently, according to Peter Wallison, a member of the Financial Crisis Inquiry Commission.

“This is Obamacare for the financial industry,” Wallison told CNBC Monday. “Basically the government is taking control of the financial industry.”

Wallison, who is also a fellow at the conservative American Enterprise Institute, pointed to the new powers of the Federal Reserve to prove his point.

“The Fed can take over any company that the regulators believe is systemically important,” he explained. “…When the Fed does take control of any of these institutions, it controls their activities, their leverage, their liquidity, their capital, so what we are creating really is a partnership between probably the largest financial companies in this country and the government. If that isn’t control of the financial industry, I don’t imagine what could be.”

Wallison said the bill will also result in the loss of credit in the US.

“Regulation will impose tremendous costs on the financial industry, and consumers will feel those costs as will anyone who needs credit. As a result, we’ll have less credit around, less financial growth and less innovation,” he added.

The one thing Wallison said the bill would not do—prevent another financial crisis. Wallison, who helped develop the Reagan administration's proposals for the deregulation of the financial services industry, vehemently opposed the idea that deregulation is what caused the financial crisis. Therefore, he does not believe new regulations will prevent another one from occurring.

“The problems we had in 2008 were … caused by the US government housing policies, which required Fannie Mae and Freddie Mac to make an enormous number of very bad loans on mortgages,” he explained. “These loans are defaulting at an unprecedented rate, drove down the capital and the liquidity of financial institutions generally that were holding these mortgages, and as a result of that we had a financial crisis in 2008.”

“If regulation was the problem," he concluded, "you have to explain to me why the banks, which are heavily regulated, got in just as much trouble as the investment banks that were not heavily regulated.”