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Capitol Hill Agenda: Reform Financial Reform

Reform of the Dodd-Frank Wall Street reforms might be a good starting place for the Republicans who formally took control of the House of Representatives today.

Capitol Hill Agenda
Capitol Hill Agenda

In the wake of the financial crisis, it seemed for a time as if we might get sensible regulatory reform that would lead to a more robust financial system capable of providing financing for the future of the American economy.

What we got was a bill named for two of the principal architects of the old financial regulatory regime that was long on promises but short on actual reform.

We’ve asked for reader contributions. (Send them our way by emailing NetNet@cnbc.com.) For now here is our start for financial reform that would actually improve things:

Republicans would be wise to revisit the phony resolution authority, which currently sets the stage for future bailouts while pretending to prevent them. A serious fast-track bankruptcy that wouldn’t sap bond market discipline by promising to leave creditors whole would be far more effective.

  • Unwind the fraught connections between ratings agencies and regulation. Perhaps the biggest scandal of the post-crisis era is that so many government regulations continue to reward the failures of the ratings agencies by demanding bond-issuers pay them fees and requiring bond-buyers to respect their judgments.
  • Redirect the SEC away from scandal-mongering insider trading enforcement and hedge fund regulation toward old fashioned investor protection. Why on earth does the SEC care whether Goldman Sachs and its millionaire clients lose their money buying phantom shares of Facebook?
  • Strip Sarbanes-Oxley of its excesses. As the financial shenanigans of Lehman Brothers show, the post-Enron reforms have done little to make business accounting more accountable. But, despite having little to show for itself, it has made it more costly for businesses and investors.
  • Move bank capital regulations away from risk-weighting altogether. The regulatory view of risk is bound to be badly flawed, and because it is regulatory it homogenizes bank balance sheets in dangerous ways. Time to get the government out of this game
  • Bring the Fed back from its monetary brinksmanship by repealing its mandate to manage the economy toward full employment. The management of the economy is beyond the capabilities of the Fed. But burdening it with this responsibility leads to irresponsible monetary policy.
  • Shut down the government’s role in the housing racket by shrinking the FHA and winding down Fannie Mae and Freddie Mac until they have vanished from this mortal world.
  • Encourage competition in finance. Strip away the various barriers to entry that prevent private equity and hedge funds from competing with banks in providing banking services or owning banks.
  • Encourage innovation in finance. The market is moving away from the idea that the best structure of a business is a publicly held corporation. In its place, we expect to see the growth of private companies whose shares are traded away from public markets, the growth of partnership, and the growth of new alternative financing techniques. Instead of worrying about the death of the IPO, lawmakers should concentrate on making sure the forces entrenched in the existing structure—especially Wall Street’s IPO hungry broker-dealers and the SEC’s moss-backed regulation mongers—do not stand in the way of progress.
  • Increase transparency. Every time a regulator or a lawmaker meets with representatives from the financial sector—or any special interest—this should be disclosed in plain English on the internet. The rationale behind agreements between wards of the state—such as Fannie Mae—and banks should be spelled out in public in advance of any deals being finalized. The balance sheets of the Fed, the GSE’s and the FHA should be transparent, detailed and presented in a manner easily understood by the public. WikiLeak thyself, regulators.
  • Break up the banks. There are no free-market reasons for the existence of our banking behemoths. No economies of scale or other market benefits are achieved by giants such as Bank of America, Citigroup and JP Morgan Chase. They exist in their current forms solely because of their ability to access the machinery of government to erect competitive barriers to entry, produce privatized profits and subsidized losses. One way to accomplish this with the support of even the staunchest libertarians: put a cap on the total amount of FDIC insured deposits at any one bank holding company.

That’s my list. We’d like yours. Email us at NetNet@cnbc.com.

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