Monday, May 10, 2010

Financial Reform??

A little bit on the Financial Reform Bill that is current being entertained by the Congress....

This piece of legislation looks like it is a slam dunk to be passed, it is really just a matter of what actually ends up the bill and what doesn't as Republicans have basically conceded on blocking the bill.

Granted, this bill is laregly aimed at large finanical institutions and the types of financing and risk protection measures they use, however, as a surprise to one, our Congress has yet again failed to recognize that the large institutions and the small ones are intrinsically linked and that regulating one type regulates all types, whether they meant to or not. I'll spare you the Friedman essay on the effects of government regulation on economic productivity.

Here are a few of key points that will likely have a major bearing on ag (or at least I feel like complaining about)...

1)Section 1012 - The creation of yet another government agency. This Homeland Securty type behemoth will be tabbed The Bureau of Consumer Financial Protection. This in and of itself comes as no surprise as Democratic led governments love to create new Bureau's, Offices, Agencies and the like.

In fact, the creation of this office on the surface appears to be relatively benign. However, when you read the fine print you will soon realize that something is amiss as this new Bureau will not be housed amongst the annuls of already existing government agencies but with in the FEDERAL RESERVE!!!

Now you might ask yourself, Eric, why did you write FEDERAL RESERVE in capital letters? Let me explain in no uncertain terms: the FEDERAL RESERVE cannot, by law, be audited, controlled, or legislated by the U.S. Congress.

You guessed it, if the U.S. Congress has no authority over the Fed, and if the Bureau of Consumer Financial Protection is housed within the Fed, then our government will have efectively created a government agency that is not overseen by the government that created it and the people that make up that government have absolutely no say on how it is run...I smell a skunk.

2) Derivatives - Much negative press has been given to the financial instrument called the derivative. How in all of its evil, it has created this financial catastrophe and it should be abolished immediately.

First of all, I think derivatives are one of the most ingenious financial inventions of the 20th and to this point in the 21st century, hence the Nobel Prize for the gents that created it. No instrument has put more lendable cash in the hands of banks to lend to people with such minimized risk...ever. The fact that some did not take the personal responsibility to not borrow more than they could afford to pay back is really beside the point.

Abolsihing the derivative would send us back to pre-1990 levels of financing. Some regulation as to how the derivative can be used may be in order, but abolishing it is not.

3)Separation of Banking and Trading - This section of the bill "The Volcker Rule" really is out of line in my opinion. To keep a very long explanation short, financial instituation trade investments back and forth amongst themselves to mitigate investment risk...sort of a a farmer hedges crops and a cattlemen hedges cattle. This rule would disallow firms from trading investments with the intent of the all knowing government "to reduce risk in the central financial system" well it will reduce risk alright, because if investment banks can't hedge risk, they aren't going to participate. Or at least they won't be nearly as aggressive at stimulating economic productivity.

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