WASHINGTON – Members of Congress agreed Tuesday that regulations for the financial system need to be overhauled,but there was little consensus among the politicians about how to do it.
At a hearing of the House Financial Services Committee,financial experts spoke about the need for changes to keep up with a rapidly changing system that is becoming increasingly global and interconnected.
Before the committee members finished their opening statements,the ideological differences and partisan divide was clear.
Committee Chairman Barney Frank,D-Mass.,said the Republican-controlled Congress from 1995 to 2006 could have passed legislation and enforced regulations and laws that former chairman of the Federal Reserve Alan Greenspan did not follow.
Because the legislation did not pass then,the country needs a different answer now to address the issue,Frank said.
Instead of talking about changing the regulatory system,Rep. Spencer Bachus,R-Ala.,the senior Republican committee member,said the committee should be talking about how to encourage people to save and to live within their means.
Mergers and bankruptcies show that the market has been “brutally efficient,” he said.
“The best way to discourage people from making loans is to make them eat those loans,” Bachus said of banks that made risky loans.
Despite fears about a socialist economy if the government pumps money into the financial markets,Alice Rivlin,a fellow at the Brookings Institution and former vice chairwoman of the Federal Reserve,said market capitalism was too powerful to be given away.
“Hardly anyone thinks we would be permanently better off if the government owned and operated financial institutions and decided how to allocate capital,” she said.
As consolidated financial institutions offer banking,investment banking and insurance under the same roof,Rivlin said it will be difficult to separate the regulations for each part,such as investments or mortgages.
The regulatory system needs to be streamlined to avoid duplication,and she said the financial behemoths need to be responsible for some of their own risk.
Joel Seligman,president of the University of Rochester,said any change to the financial regulatory system needs to address the differences between federal and state regulations. And as companies go abroad,he said,there needs to be a system to coordinate international regulation.
“The system has to be comprehensive,” Seligman said. “There has to be some sort of risk manager at the top to oversee it.”
But officials working with community banks said they fear the smaller banks that did not follow the same risky business models as the financial giants would suffer under unnecessary regulation.
Edward Yingling,president of the American Bankers Association,said the credit freeze has not affected community banks,which are still issuing loans to businesses and individuals.
“This has had a very negative effect on the good banks who didn't cause any of this,” he said.
Congress cannot dictate the morality for a company that chooses to make risky business decisions,said Rep. Carolyn McCarthy,D-N.Y.
Instead,she questioned what lessons members of Congress should learn from how other nations responded to the global financial crisis so that new laws could be shaped to prevent the same problems in the future.
“Have they done anything that we should do differently?” she said.
Yingling said someone needs to be assigned to look out for potential economic problems,such as the spike in mortgages with no down payments from 2004 to 2007.
Mike Washburn,president of Red Mountain Bank in Hoover,Ala.,who spoke on behalf of the Independent Community Bankers of America,said regulations need to distinguish between large financial institutions and community banks.
A small bank like his could use capital from the federal government to improve loans,but it does not need the same restrictions,Washburn said.
“We operate off a very simple business model,” he said. “We lend money to people who will pay it back.”
Following that model,he said small banks will avoid the same mistakes that led to the financial crisis.
After the committee members questioned eight witnesses for five hours,Frank came back to the same question that started the hearing.
Under the evolving system still regulated using many laws that date to the Great Depression,Frank asked,”How do we put constraints on the new financial system?”