Fix our economy part II

Second in a multipart series about what a Republican House and Senate could do despite Obama as President.

Larry Kudlow says that a Republican Congress could do two important things if they had a majority.  First, repeal the fiduciary requirement of Dodd-Frank. Second, act to stop requiring banks to lend home mortgages when the mortgagee is not a good credit risk.  Bad risk lending is an well-recognized important cause of the Recession of 2007.  Oddly, Dodd-Frank misses this cause entirely in a wrongheaded attempt to make credit-crisis recessions never happen again. 

 

Let’s look at fiduciary duties first.  Dodd-Frank attaches a fiduciary duty to anyone who gives financial advice.  That means that anyone giving financial advice is held responsible for the actions of account holders who take that advice or are under the mentor of the advisor.  That is, the advisor assumes a duty for the account to be traded reasonably.  But what happens if a client demands that his broker do foolhardy things and subsequently loses his shirt? Here’s the catch. The broker, not the wacko client is held responsible.  Hence in any case where a broker advises trades that lose money, clients can sue. 

 

What will this cause?  Brokers are now demanding agreements where they have absolute authority in all trades.  Still, lawsuits threaten to overwhelm brokers as they once did in Europe.  Europe’s solution was for  government to authorize only a few mutual funds for investment.  This is the way it is done in Britain and Germany and most of Europe today. You go to a bank and select from a handful of index funds.  There are no other funds allowed.  Consumer choice is almost nil.  The bureaucrats are in control of your ability to invest.  Needless to say, government mutual funds suck.  Moreover, fees are set by the bureaucrats.  Instead of half or one percent management fee, it is typically 1.5% and set by law.  Of course, the rich can invest in individual securities, but most middle class folks are locked into poor gains. 

 

Not removing this aspect of “Frankendodd”, Kudlow will lead to languishing 401K’s which will spawn poor investor and consumer sentiment and a lethargic economy. 

 

Have you noticed how hard it is to get a loan these days? Privatizing Fannie Mae and Freddie Mac would release a great deal of capital into the loan markets.  Banks are skittish after the mortgage crisis of this last recession and are trying to lend only to good credit risks.  But if government demands they lend to borrowers doomed to default, we are only setting ourselves up again for a second crisis.  In this environment, banks hold their funds overly close to their chests and are invested largely in treasuries, instead of lending it to ordinary people.  But if we would allow bad loans to fail and the market to heal, then natural creditworthiness to rule the loan marketplace, lending would increase 50% Kudlow insists.

 

Finally this point is made about Sarbanes-Oxley.  Do you save all your old junk mail?  How about the spam on your computer.  Probably not, but the finance industry is required by this bill to save ALL communications, including a vast amount of advertising and junk solicitation. Congress needs to correct this and in so doing will lower finance costs which have risen considerably in recent years.

 

The communications requirements and the onerous fiduciary duty could probably be handily passed by a Republican Congress and even passed over Presidential veto with a bipartisan plan.  But the matter of rescinding  bureaucratic lending meddling would be a tougher sell without a Republican President.