Copyright 2010 Gannett Company, Inc.All Rights Reserved USA TODAY
March 1, 2010 Monday FIRST EDITION
SECTION: NEWS; Pg. 9A
LENGTH: 369 words
HEADLINE: Don’t restrict innovation; Opposing view: Subprime mortgages, not in-house trading, triggered financial crisis.
BYLINE: Scott Garrett
In the aftermath of the financial crisis, the phrase “systemic risk” entered our national conversation in a way that even the most pessimistic economic forecaster could not have predicted. The mistaken idea that some companies are “too big to fail” simply serves to perpetuate a bailout mentality.
Unfortunately, many embraced this logic, and in the midst of the economic crisis, a frantic search through many financial institutions commenced, with members of Congress, the media, and other interested parties searching for any party or product that might serve as the culprit for the poisoned health of one of these institutions. Many Band-Aid solutions have been proposed, the latest of which is the “Volcker Rule.”
If implemented, the Volcker Rule would ban banks with government-backed deposits from conducting their own trading. It would also bar a bank from owning its own hedge fund. While this might sound reasonable, upon further analysis, it is revealed that barring activities such as proprietary trading would have limited impact, if any, on the risk-taking that contributed to the rash of recent bank failures.
In reality, the heavy investment in real estate, including subprime mortgages such as those guaranteed by Fannie Mae and Freddie Mac, has been identified as the main factor for increased risk to banks. Wachovia, Washington Mutual, Countrywide and IndyMac failed as a result of defaulting subprime mortgages. Additionally, Bear Stearns, Lehman and Merrill Lynch were all weakened by their exposure to credit risk from real estate.
The goal of financial services regulatory reform must be to achieve financial stability and end taxpayer-funded bailouts. This process should not be viewed as an opportunity to restrict innovation or exact punitive regulations on financial activities that did not cause the crisis. It would be counterproductive, to say the least, if in our efforts to ameliorate so-called systemic risk, we advance policies that take away the ability of so many firms across all sectors of our economy to responsibly manage their own risks.
Rep. Scott Garrett of New Jersey is the ranking Republican on the Capital Markets, Insurance, and Government-Sponsored Enterprises Subcommittee.
LOAD-DATE: March 1, 2010