Financial "Reform" Legislation is False Advertising

Headlines may be proclaiming the passage of "financial reform" legislation, but the policies approved in the House of Representatives on June 30 are far too inadequate to deserve the label "reform." Instead of true reform, congressional Democrats did what they always do: expand government bureaucracy, increase tax burdens and then make the media rounds to declare success.

The most egregious failing of the so-called "Restoring American Financial Stability Act" is the complete absence of any policy to address mortgage giants Fannie Mae and Freddie Mac. These government-sponsored enterprises were at the heart of the housing crash that precipitated the financial crisis. Tasked with a mission to create six million new homeowners and abetted by liberals in Congress, Fannie and Freddie set about subsidizing increasingly risky loans to people who simply could not afford them. When the inevitable wave of defaults and foreclosures started, the entire financial system was affected due to the proliferation of mortgage-backed securities based on the bad loans enabled by Fannie and Freddie.

The reckless practices of Wall Street firms like Goldman Sachs and Citigroup might have received the most press, but it is Fannie Mae and Freddie Mac that may ultimately end up costing taxpayers the most money. Since the government moved to take over the two companies in September 2008, they have drained $150 billion in taxpayer dollars. That dwarfs the $70 billion cost of rescuing AIG and the $77 billion loan to the auto industry. And there is no end in sight. Thanks to Obama's pledge of unlimited federal funding to prop up the incompetent duo, the Congressional Budget Office estimates that taxpayers may end up paying as much as $389 billion to support Fannie and Freddie.

All the while, these organizations continue to play a major role in the housing market they helped devastate. According to the Heritage Foundation, Fannie and Freddie "financed or backed about 70 percent of single-family mortgage loans" last year. The New York Times reports that the two "took over a foreclosed home roughly every 90 seconds during the first three months of the year" before selling them at a loss that costs taxpayers about $10,000 per house.

Given the magnitude of Fannie and Freddie's culpability and ongoing entrenchment in the financial crisis, it is inconceivable that they could be ignored in legislation advertised as financial reform. But that is exactly what has happened under the Democratic majority.

As for Wall Street, the legislation purports to curb risky business practices by simply expanding the regulations that failed to prevent the crisis in the first place. The bill increases the power of the Federal Reserve, Treasury Department and SEC -- the same band of bureaucrats that turned a blind eye to Bernie Madoff's crimes. Officials in these departments will be given enormous authority to enforce rules that restrict credit access and raise costs on businesses. Even worse, the legislation makes "too big to fail" permanent policy, jeopardizing taxpayer money every time an FDIC bureaucrat decides to intervene in the market and take over a failing firm. As the Wall Street Journal put it, congressional Democrats "have taken 2,000 or so pages to double and triple down on the old system that failed."

For all the fanfare surrounding the legislation, Americans are no safer from another economic collapse today than we were before it was passed. The Obama administration needs to listen to the American people and accept that more government bureaucracy is not the answer to our challenges.

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