Senator Chris Dodd’s monstrous 1336-page financial reform draft includes a whopping 217 pages devoted to “improving” over-the-counter derivatives markets. Dodd the derivatives section may be replaced by a yet-to-be-released bipartisan compromise from Senators Jack Reed and Judd Gregg. But the Dodd draft suggests that legislators are focused on bureaucratic imperatives rather than improving markets.
The biggest blind spot in Dodd’s draft is the assumption that only command and control regulation can improve markets. In fact, beginning even before the financial crisis, an international cooperative effort of derivatives market participants led by the New York Federal Reserve has led to significant improvements in the market.
Over the past 18 months, while Washington dithered, derivatives market participants standardized derivatives products, implemented central clearing, began informational reporting to the public and regulators, and are exploring exchange trading. The Dodd draft is written as if none of this ever happened, perhaps for no better reason than that the steps were not mandated from Washington. In fact, Dodd calls on the industry to achieve just these steps six months or a year after his bill is passed (assuming that ever happens).
Having Washington pile on now with more regulations will only disrupt what the markets have already achieved, and freeze progress in late 1998 when the concepts in the Dodd draft were first floated.
Even assuming derivatives require more regulation, Dodd’s second mistake is fixating on who gets the job rather than how it is done. Differing types of derivatives have attributes akin to securities, futures, insurance, and banking products. Derivatives confound jealously-guarded jurisdictional boundaries in existing bureaucracies and, even more disconcertingly for legislators, in Congress.
Dodd proposes a classic Washington compromise: decide not to decide. The Dodd draft solves the jurisdictional conundrum by giving joint jurisdiction over derivatives to two Washington-based agencies: the Securities and Exchange Commission and the Commodity Futures Trading Commission. Disputes between the agencies are to be resolved by a new regulatory council composed of representatives of those two and yet other financial regulatory bodies.
In other words, if two commissions with ten commissioners can’t solve the problem, Congress will call in … even more commissions and agencies.
What’s puzzling is why Dodd ignores the one agency that (a) has experience in regulating derivatives trading and (b) has actually fostered recent major derivatives market improvements: the Federal Reserve Bank of New York.
It’s not as if Dodd is unaware of the New York Fed: his draft proposes to make the Chair of the Bank a Presidential appointee subject to Senate confirmation.
There’s no reason for Congress to add another layer of regulation on to this market. Cranking up regulation could in fact make things worse by disrupting the positive changes already taking place. Bureaucrats will disrupt productive markets self-corrective processes and result in unintended consequences. But if Congress does intervene, any steps should reflect the current state of the derivatives markets, not where they stood two years ago. And Congress should give any regulatory authority to an agency with a proven track record at improving markets, rather than creating a gridlock-prone dual-headed scheme.
House Cloakroom: February 22 – 26
Analysis:
The House will be back in session this week after two weeks off because of the snow and the scheduled President’s day recess. The biggest event this week will actually be off the Hill and over at the White House Health Care Summit, an effort to push forward a deal to get health care reform passed this year.
Back on the Hill, the House expects to take up several pieces of legislation including the controversial Native Hawaiians bill which would set up a race-based government of “indigenous, native people of Hawaii,” one that opponents argue is unconstitutional. For more on this subject, read a column by Brian Darling, Director of Senate Relations at Heritage, who wrote about this problematic legislation back in December. Also of concern for next week could be a House Resolution to withdraw troops from Afghanistan. Lastly, the House plans to take up the Intelligence Authorization bill.Major Floor Action:
- HR 2701 Fiscal 2010 Intelligence Authorization
- H.R. 2314 Native Hawaiian Government Reorganization Act of 2009
- Possible House Resolution under War Powers Act withdrawing troops from Afghanistan
Major Committee Action:
- The House Appropriations Subcommittees will be holding a series of hearings on proposed fiscal 2011 appropriations.
- The House Foreign Affairs Committee will hold two hearings this week. The first will be on “Hard Lessons Learned in Iraq and Benchmarks for Future Reconstruction Efforts” and the second will be a full committee hearing on the State Department budget for fiscal year 2011.
- Both the House Oversight and Government Reform and Energy and Commerce committees will hold hearings concerning the issues surrounding Toyota vehicles.
Senate Cloakroom: February 22 – 26
Analysis:
The Senate was supposed to focus on jobs this week, but floor action is likely to be eclipsed by several major policy developments. Senator Chris Dodd (D-CT) is expected to unveil a new financial overhaul bill. The White House, in advance of its “bipartisan” health care summit, is expected to announce a deal that would move health care reform forward. That deal is likely to include the controversial use of reconciliation. Ironically, both proposals are likely to destroy jobs.
Major Floor Action:
Before adjourning for recess, Senate Majority Leader Harry Reid (D-NV) introduced his $15 billion stimulus plan that includes a hiring tax credit, expensing provisions and an extension of highway funding. Reid also used a procedural tactic called “filling the tree” to prevent any amendments from being offered. Press reports suggest there is bipartisan opposition to his proposal.
Major Committee Action:
- The Finance Committee will hold a hearing on small business job creation. Perhaps a No Cost Stimulus could spur business hiring and job creation.
- The Armed Services and Budget Committees will hold hearings on our defense budget.