Opinion

The Great Debate

Servicing the underbanked

A new report from the United States Postal Service inspector general proposes that the agency offer non-bank financial services, including payday loans. Opinion pieces and blog posts praised this idea as a way for the post office to solve its fiscal woes while reaching a portion of Americans outside the traditional banking system. A Reuters “Great Debate” piece, “Transforming Post Offices into banks”), called the proposal a “win-win.”

These pieces overlook some practical problems, however, and leave numerous questions unanswered about implementation. While government and charitable-sponsored financial services should play a role in consumer lending, they cannot replace market-based solutions.

Notably, the USPS proposal underestimates the challenge of offering consumer financial services in an increasingly competitive marketplace regulated by complex federal and state laws. Without a sizable government subsidy, the report’s suggested interest rate for small-dollar loans would not even cover basic operating expenses.

A number of credit unions, community banks and nonprofit organizations have started similar, artificially low-priced, small-dollar loan programs only to struggle to sustain operations, much less make a profit. This has led many institutions — credit unions in particular — to conclude they cannot viably provide short-term credit, according to research by University of California, Davis Professor Victor Stango.

Local storefront lenders can offer market-competitive prices — with rapidly diversifying portfolios, insights from data on consumer trends and operational efficiencies — to meet the growing demand for short-term loans and other non-bank financial services.

The battle over money funds

Both Securities and Exchange Commission Chairman Mary Schapiro and Federal Reserve Chairman Ben Bernanke have warned in recent days that money market funds remain vulnerable to runs. That is unquestionably true, and if a run occurs, U.S. taxpayers will bear the costs of bailing them out. Should taxpayers continue to subsidize the money market mutual fund (MMMF) industry?

The run on U.S. MMMFs in September 2008 was a critical moment in the financial crisis. It underscored the extent to which these funds, an important part of the shadow banking system, created systemic risk that indirectly threatened the financing of even the healthiest U.S. firms. To end the run, the U.S. Government guaranteed MMMF liabilities, sustaining the funds’ promise to pay $1 for every share.

That guarantee stopped the run, but it also created enormous moral hazard. Were a similar threat to arise today, we can safely assume that taxpayers would remain on the hook to rescue the MMMFs. This uncompensated, rainy-day backstop constitutes a subsidy to the MMMF industry — and to its investors and borrowers.

The next hot ticket in financial reform

By John Morrall, Richard Williams and Todd Zywicki
The opinions expressed are their own.

With Larry Summers leaving his post at the White House and Elizabeth Warren recently appointed as the special adviser to the new Consumer Financial Protection Bureau, the hot ticket is still to be the head of the bureau. All eyes should not just be on the appointment of the bureau’s first head, though, but on the bureau itself, for it is the centerpiece of financial regulatory reform.

More important than the innocent wagering among K streeters and Hill staffers, the horse-race to head this powerful new regulatory entity is emblematic of the incredible uncertainty surrounding new financial regulation. This makes it even more important to be clear about the effects, and not just the intentions, of this new regime.

Senate vote exposes Wall Street impotence

Wall Street’s diminished influence in Washington was made plain yesterday when the Senate voted to approve financial reform legislation by 59 votes to 39.

Industry lobbyists will point out the bill only just managed to scrape the required votes needed to end debate and forestall a filibuster. It fell far short of a lopsided bipartisan majority.

But the formal tally on HR 4173 (Wall Street Reform and Consumer Protection Act 2009) as amended by S 3217 (Restoring American Financial Stability Act 2010) conceals a much wider bigger majority of 63-37 for enacting far-reaching reforms.

Communities of color need financial protections

- Jose Garcia is associate director for research and policy at Demos. He is responsible for providing statistical and policy analysis for Demos’ Economic Opportunity Program on issues such as household debt and assets. -

As the days heat up, so too has the debate in Congress over what type of consumer protection to include in financial reform legislation. Detractors have moved to take the bite out efforts to crack down on abusive lending practices while advocates try to hold the line. Should there be an independent Consumer Financial Protection Agency? Or should it be housed in the Federal Reserve? And what authority should it have?

The debate has taken place at a time when debt continues to undermine the economic mobility of many American families and how Congress resolves the issue in the next couple of weeks will be critical to the future of those families, particularly consumers of color. It’s no exaggeration to say the creation of an independent agency may be the only means for addressing generations of abusive lending that has saddled communities of color with unmanageable debt.

After clash, Senate filibuster ends in whimper

Just a few minutes after the Senate failed for a third time in as many days to reach the 60-votes needed to approve a cloture motion on the financial reform bill (failing 56-42), Senate Majority Leader Harry Reid rose to his feet and asked the chamber’s presiding officer:

“Mr President, I now ask unanimous consent the motion to proceed to S 3217 be agreed to.”

After the president officer asked for objections, and heard none, he replied “Without objection, it is so ordered,” according to the Congressional Record.

Wall Street needs to return to the basic principles of regulation

– Damon Silvers is director of policy and special counsel for AFL-CIO. The views expressed are his own. —

The Wall Street Accountability Act is a conservative piece of legislation.  It is a return to the basic principles of financial regulation that helped our country and the world avoid major financial crises from the 1930’s to the 1980’s, principles that our country turned away from in the name of free market fundamentalism and under pressure from the political power of the financial sector itself.

While the legislation is long and detailed, the principles of financial regulation it embodies are simple and straightforward.

SEC’s case against Goldman highlights need for Wall Street reform

Ed Mierzwinski is the longtime consumer program director of U.S. PIRG, the federation of state Public Interest Research Groups. U.S. PIRG is a founding member of Americans for Financial Reform, an unprecedented coalition of over 250 labor, senior, civil rights, community and consumer organizations. –

Over 18 months ago, U.S. taxpayers bailed out the reckless Wall Street banks. Yet, despite widespread and overwhelmingly public support for Wall Street reform and dramatic House action in December, efforts to move a Wall Street bill through the Senate have been stalled for months by a phalanx of powerful Wall Street lobbyists. While we cannot count them out, because they’ve increased their lobby and campaign spending as we move toward the endgame, Banking Committee Chairman Chris Dodd’s (D-CT) coup in moving a strong bill closer to floor action gave us some wind in our sails.

Then, several events last week put an even bigger whirlwind behind our reform efforts.

China’s yuan, not the dollar, is too cheap

morici– Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former chief economist at the United States International Trade Commission. The views expressed are his own. —

From Berlin to Bangkok, governments are screaming about the falling dollar, because they can no longer rely on reckless American consumers to power their economies.

From the late 1980s to 2007, the global economy enjoyed The Great Moderation-low inflation and sustained growth interrupted by brief recessions. Driving global growth was an eight fold increase in the U.S. trade deficit, facilitated by a doubling of the value of the dollar against other currencies from 1989 to 2002.

Don’t give the Fed a new job

williams_mark– Mark T. Williams, a former Federal Reserve Bank examiner, teaches finance at Boston University’s School of Management and is writing a book on the rise and fall of Lehman Brothers. The views expressed are his own. —

In the real world, outside the Washington Beltway, when someone does a bad job they do not get more work.  The Council of Institutional Investors and the CFA Institute Center for Financial Market Integrity task force report agrees with this fundamental point:  Don’t give the Fed the new job.  As an ex-Fed examiner, I applaud this conclusion.

Creating an independent Systematic Risk Oversight Board (SROB) to monitor firms that pose significant risk to the market would inject new honesty to regulatory supervision.  This sound proposal comes at a time when Treasury Secretary Geithner would like to give his former employer, the Fed, additional regulatory duties even if they have failed to earn this right.  The report also is critical of previous light-touch regulation.  The SROB would provide a firmer approach, not repeating the mistake made by the Fed of coming with a knife to a gunfight.

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