Wall Street reforms crush Main Street

On Dec. 11, Congress passed the Wall Street Reform and Consumer Protection Act of 2009, an odd title that shows how Financial Services Committee Chairman Barney Frank tried to combine needed systemic reform with a mostly unrelated agenda item from the Democrats' old wish list.

As White House Chief of Staff Rahm Emanuel, paraphrasing Machiavelli, likes to say, "You never want a serious crisis to go to waste."

There was an element of this bill that Republicans and moderate Democrats hated, establishing the Consumer Finance Protection Agency. The name sounds good right? However, the CFPA was the most problematic and controversial element in this package.

Why dislike the CFPA? Because it would add $4.6 billion to the deficit and it would be a job-killer. It would also make consumers angry by constricting credit. Ostensibly set up to oversee credit card and mortgage practices, this agency will result in some people losing credit options while the rest will just pay more for credit.

Of course, the more people lose their credit, the harder it is for the economy to recover. If people can't borrow the money to fix their brakes, soon the auto repair shops go under. You get the picture.

The job losses wouldn't be just in the credit business. In fact, the very threat of the overall legislation has already been a drag on the economy. Lenders have told me they have been unable to justify expansion in an atmosphere of uncertainty, and certainly not with Congress promising "death panels for non-banks."

This idea of further regulating non-banks and their products is one of the most revealing and profound flaws in the Wall Street reform act. The premise was that banks are already regulated and that most of the cost of this new regulation must be borne by non-banks. But that term includes a wide range of lenders, even after some were given a reprieve. Some may indeed be unregulated while others, like the small installment loan companies, are already highly regulated, every office being separately licensed and frequently audited by the state where it is located.

When homeowners borrow money to replace the hot water heater and pay it back in 12 monthly installments, this is the safest kind of loan devised for the consumer. Now this loan would be thrown into the same regulatory bundle with much riskier products.

The goal seems to be to kill off non-banks, which make their loans based on creditworthiness and price them according to their costs, and to replace their loans with loans made by banks.

Thanks to rules set up through the Community Reinvestment Act, TARP and the FDIC, I can see banks being forced to make small, subprime loans at a loss. Banks are already alarmed at the idea and are telling anybody who'll listen they don't want to do it. Every single bank that participated in an FDIC "small dollar" loan program lost money on it, but disturbingly the FDIC still proclaimed it a success. (Wasn't the FDIC's primary mission to protect deposits and keep the banks away from risky subprime loans?)

If the idea of using the credit institutions of this country to further a social and political agenda at their own considerable risk seems both frightening and familiar, it should. This is exactly what happened with Fannie Mae and Freddie Mac.

Who defended these government-sponsored enterprises? Who praised their mission, encouraged their growth and resisted attempts to regulate them? The same folks now planning to use the banks the same way while killing off their "non-bank" competition in one of the largest government power grabs ever seen?

It will be late January before the Senate is ready for move forward on the House-passed financial regulation bill. It will be interesting to see what, if anything, survives of the controversial Consumer Finance Protection Agency.

My advice to the U.S. Congress is, if you're serious about reforming Wall Street, don't take it out on Main Street.

Merry Christmas and Happy Hanukkah everyone.

J.C. Watts (JCWatts01@jcwatts.com) is chairman of J.C. Watts Companies, a business consulting group. He is former chairman of the Republican Conference of the U.S. House, where he served as an Oklahoma representative from 1995 to 2002. He writes twice monthly for the Review-Journal.

Review-Journal columnist Glenn Cook will return next week.