The following is an opinion piece written by Peter Schiff, president of Euro Pacific Capital and author of Crash Proof 2.0: How to Profit from the Economic Collapse. Mr. Schiff, a Republican, is also running for the U.S. Senate seat currently held by Banking Committee chair Christopher Dodd.
In a speech to Wall Street today, President Obama talked of a "failure of responsibility" in Washington and on Wall Street. But the financial sector is the most regulated part of the economy, so surely responsibility lies mostly with Washington. It was the federal government that created deposit insurance, which removed risk (and therefore caution) from bank deposits. It was also the feds that created "too big to fail," our new system of private profits and socialized losses. Most importantly, it was federal taxes and regulations that undermined our productive capacity, rendering us weak in the face of financial shocks.
In this speech castigating private greed, no mention was made of Fannie, Freddie, or the FHA's role in encouraging sub-prime loans, nor of the Fed's ultra-low interest rates which made the mortgage "teaser rate" possible. The maligned "unregulated derivatives" market was largely based on exposure to these government-backed loans.
Obama claims he wants "common sense rules" to be put in place. Yet, his reform proposal defies common sense.
The new "resolution authority" is an attempt to replace the traditional bankruptcy court system with a bailout bureaucracy that subordinates the rule of law to political expediency. The result of this reform will be to increase uncertainty for any honest market participants - and create a protected sandbox for firms connected to the executive branch.
The "Volcker Rule" to split up large firms runs directly counter to this, and the past, Administration's encouragement of dominant banks to buy their weaker competitors. Ironically, the additional regulations put in place by the bill will create tremendous barriers to entry for new firms, and strongly advantage those firms that can create the largest economies of scale (number of productive employees per compliance officer).
So long as the Fed continues to hold interest rates artificially low and the government continues to guarantee mortgages, real estate prices will remain distorted, credit will be misallocated, moral hazards will increase, and the underlying fundamentals of our economy will continue to deteriorate. Contrary to the President's assertion, government bailouts and stimulus have weakened the underpinnings of our economy, not saved it. As a result, the next economic crisis, likely to hit within a few short years, will be that much worse. Not only will this new regulation do nothing to prevent the second phase of the crisis, it will more than likely increase its severity.
The President seems to insinuate the he saw the crisis coming. Well, I was on national television as far back as 2005 explaining the problem and warning of an impending crash. This was back when Senator Obama was voting for the bills that made it all possible. Since the proof is in the pudding, click here to see my presentation to the Mortgage Bankers Association in 2006.