West Virginia Record

Saturday, February 29, 2020

Duke prof: Efforts at financial reform misdirected

By John O'Brien | Apr 26, 2010


DURHAM, N.C. - President Barack Obama is on a publicity tour to tout proposed financial industry reform proposed by outgoing U.S. Sen. Chris Dodd.

But according to Duke University professor and former North Carolina gubernatorial candidate Michael Munger, the two should be more worried about other economic problems, some of which were caused by Dodd.

"It's just political grandstanding," Munger said Wednesday. "For Chris Dodd to make this his legacy, as if he is going to fix the financial industry crisis he had a big role in causing, is beyond hypocrisy."

Obama says the legislation will prevent a future collapse of the financial industry like the one that led to taxpayer-funded bailouts last year. It also creates a rule-making Consumer Financial Protection Agency.

Munger noted the timing of the Securities and Exchange Commission's lawsuit against Goldman Sachs, filed Friday. Goldman Sachs is alleged to have marketed securities designed to fail for the gain of hedge fund Paulson & Co.

"I'm willing to believe Goldman Sachs did some dumb things, and maybe some fraudulent things. Simultaneously, the timing of this bill and going after Goldman Sachs, it looks like a political setup," Munger said.

"That's fine. That's the sort of thing you do when you're trying to win at politics. But it seems our energy would be better spent thinking about the unemployment rate rather than regulating the financial market."

Munger earned his PhD in economics at Washington University in St. Louis and worked as a staff economist at the Federal Trade Commission. A Libertarian who received 3 percent of the 2008 vote for governor, Munger, who also has a PhD in political science, is the head of the political science department at Duke.

Munger said the economy looks like it is strengthening, but the proposed legislation could eventually drive up interest rates.

"It will mean, to the extent that some of the regulations will impose a new burden on credit markets, that it will dry up some of the liquidity we need to start new businesses," Munger said.

"In the short run, companies will not be willing to take on new employees. They'll try to borrow a little bit of money and get by on what they're doing. This bill dries up liquidity."

Dodd is in his last year in the Senate, with Connecticut Attorney General Richard Blumenthal hoping to become his successor. Blumenthal issued a press release Monday that said he is reviewing the SEC's complaint against Goldman Sachs and may initiate an investigation.

Munger has given speeches on what he feels are the real causes of the financial crisis. Dodd was a major cause, he claims.

"Chris Dodd suppressed, particularly in the late 1990s, regulations on credit default swaps," Munger said.

"People wanted to regulate credit default swaps as if they were insurance, but Chris Dodd spearheaded an effort, and Bill Clinton signed, and allowed credit default swaps and a variety of other derivatives to be almost completely unregulated."

Dodd also turned back efforts to regulate Fannie Mae and Freddie Mac. In the 1990s, New York Attorney General Andrew Cuomo, then the secretary of the Department of Housing and Urban Development, required Fannie Mae and Freddie Mac to buy $2.4 trillion in mortgages over a 10-year span.

Cuomo said that meant affordable housing for 28.1 million low- and moderate-income families. Munger said that meant other banks had to finance questionable housing loans to keep up.

"The idea that the failure of regulation caused the financial crisis is ludicrous," Munger said. "The problem was negligence. We bailed out the most negligent parties with taxpayer money.

"We created a moral hazard that if you win, you get to keep your money, and if you lose, you were playing with house money and if you lose you get it back."

That "moral hazard" is another problem Munger has with Dodd's bill. It creates a $50 billion bailout fund provided by taxes on financial institutions.

"(I)t makes some sense, since it's contributed to by the banks themselves," Munger said.

"You might think of it as an insurance policy. The problem is the moral hazard, taking risks because they know they are 'too big to fail.'

"You want firms that take bad risks to fail. If they are too big to fail, then they are too big."

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