Due to the space limitations imposed on me by the News-Sentinel I was not able to talk about the other odious provisions of the Dodd bill. One is that it will kill angel investors and those companies that depend upon them. As you know, an angel investor is typically a wealthy person or persons who provide funds for business startups or young businesses who are capital-starved. The Dodd bill would require startups wanting funding to register with the SEC and wait for an SEC review that could take up to 120 days. Then any investor must need assets of $2.3 million and an income of $450,000. I was reminded of this provision by the CEO of a successful California firm that I met in Hilo while on vacation. He said in a letter to Sen. Feinstein that if this provision were in effect, he would have never gotten his company off the ground. I am tempted to say that this is consistent with the anti-business attitude of the current party leaders in power but I though that they were champions of the little guy? Other provisions call for the President of the New York Fed to be a political appointee. This is actually nothing new. Some members of congress have been trying to politicize the Fed presidents for years. It was a bad idea when proposed annually by Henry Gonzalez (D-TX) and it remains a bad idea today. Another bad idea is in an amendment welcomed by Sen. Dodd to audit the Fed. As I have written before I am not opposed to an annual audit. What I oppose is the audit being public information. If disclosed at a hearing closed to the public - much like the CIA - then I have no objection. However a public audit would act to again politicize monetary policy. Another bad idea.
I am retiring at the end of the next academic year and none too soon. Even though there is no requirement age at UT its time for me to go. I don't like this generation - and yes I told them that and why. The reason has nothing to do with their bad taste in clothes , music, or propensity to mutilate their bodies with assorted piercings and ink. That is nothing new. I can get quotes from Aristotle to John Stuart Mill to my father and it would sound like they all are talking about today's youth. No it is because of something else. I believe that each generation has about the same percentage of people who are really smart, those who are competent, and those who are mediocre. What makes this generation the absolute worse is that they have at their disposal virtually unlimited cheap information and they do not use it. When I was young, I could not ask my parents "why?" We had an encyclopedia britannica and I had to look up the answer and then go discuss it with my parents. When I was a young assistant professor, I had a carel in the library and in it were tons of books. I would read one, then go into the stacks to get another and the process was seemingly endless. It would take months to research a paper. I then had to get the data put on IBM cards, eventually get the output, write it, get it typed in the typing pool and then circulate for comments and then the process would begin again on the revision. I was lucky to get a publication every other year. Now the basic research can be done in a week and a draft can be out in a month. If I had today's technology when I was 25 there would be no reason why I shouldn't have won a nobel prize by now. In my class I gave an assignment on today's yield curve compared with last week's and last month's. The answer I got was right out of the text book and was wrong. That is because the yield curve's steepness made explanations regarding upward sloping curves problematic. I then told the class that the answer could be found on the internet. The next group of answers were also wrong since most of the students went to Wikipedia or stopped at the first hit instead of doing an in-depth search. So the reason I don't like this generation is because it is the first one where the merely competent and the mediocre have the opportunity to be as informed as the smart ones but aren't because they are intellectually lazy and uncurious. What a waste. I can't wait to retire.
In the bill's summary it says the failures that led to the financial crisis require bold action. Reading that you think the reason why the financial system teetered - the bursting of the asset bubble in housing - would be attacked in the legislation. But lo and behold, in its almost 2,000 pages there is hardly a mention of housing and Fannie Mae or Freddie Mac.
Indeed, there is nothing in the bill remotely connected with the causes of the financial crisis. Instead, Dodd's financial reform bill is another power grab by this bunch of politicians. It creates a single regulator of consumer protection regulations even though there is no evidence that consumer protection has anything to do with the financial crisis. This new agency will be headed by a single political appointee of the president. All consumer lenders, including those only regulated by the states such as small consumer installment lenders, now would be subject to federal oversight.
The new, powerful regulatory czar would be certain to enact rules that would limit credit granting to poorer households and small businesses. There will be a new agency for "financial stability" with another single politically appointed czar. This czar would have the power to shut down a company that might pose a risk to the financial system.
This unprecedented stunning power would leave all large organizations operating at the sole behest of the shutdown czar. Now how this czar would have any idea of who to shut down escapes me. If this czar existed during the tech bubble, companies like Google and Amazon probably would have been shut down as they grew in excess of their valuations. Heaven help us. Within this new agency will be a $50 billion slush fund paid for by all financial institutions that will allow for the orderly failure of big institutions. In essence, the $50 billion would be used to pay out the creditors of the firm being shut down.
This is moral hazard on steroids and ensures bailouts forever.
There is the new single bank regulator that rolls the supervisory functions of the Fed, the FDIC, the Comptroller of the Currency and the Office of Thrift Supervision (S&Ls) into one agency headed again by a single political appointee - do you see a pattern here? There is regulation of hedge funds by the SEC. Well at least it did not create a hedge fund czar. Over-the-counter derivatives are to be regulated by the SEC. Firms that sell instruments that are packaged and sold (securitization) must retain a portion to bear some of the risk usually passed forward into the market.
Such a provision is probably unnecessary since the market will now enforce on the originator the early put back provisions of early defaults and the representations and warranties in each contract. It creates an office of insurance within the Treasury department and an office of credit ratings at the SEC. Now I am certain that Dodd's bill, which is aiming at everything moving in the financial market except the ones most intimately involved in the financial crisis, has nothing to do with the fact the major recipients of lobbying funds from Fannie Mae and Freddie Mac were Sen. Dodd and then Sen. Barack Obama.
But then of course, I am probably naive.
Dr. Harold Black is the James F. Smith Jr. Professor of Finance at the University of Tennessee. He can be reached at email@example.com. Scripps Lighthouse
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com