Creating an Effective 113th Congress: House Financial Services Committee

Understandably, achieving conservative victories in Congress is generally an uphill battle.  Electing conservatives to Congress – as Americans did in 2010 – is a step in the right direction, but their ability to accomplish conservative goals is greatly enhanced if they get into some of the more significant and influential committees; conversely, if conservative members are blocked by the Establishment from these influential positions, the climb to success is much steeper.

Heading into the 113th Congress, the House Financial Services Committee should be viewed as a key committee.

Heritage Action has identified a number of steps that principled conservatives need to take in the next Congress.  Reform is needed in several areas either because the idea was poorly thought out from the start, like the Volcker Rule, or because it has become moot, like the Terrorism Risk Insurance Act (TRIA).

First, it is time to end the Terrorism Risk Insurance Act, which is currently set to expire in 2014.  Heritage explains that this program was very useful after September 11, 2001.  Immediately after the 9/11 attacks, it was too difficult a task for insurers to estimate the risk; there was much uncertainty about the magnitude of the risk of a terrorist attack — something which had become a very real possibility.

However, now it is time for the private insurance market to gradually readopt the task of providing people with terrorism insurance.  In a testimony on September 11, 2012 before the Subcommittee on Insurance, Housing and Community Opportunity of the Financial Services Committee, Heritage’s David C. John explained:

“The industry should have developed ways to price terrorism coverage properly, which could include upper limits on company liability. And reinsurers should have found ways to involve sophisticated investors who, for a price, could face the type of losses that could occur.

Recent industry data indicates that there has been a great deal of progress towards making terrorism coverage both widely available and affordable.”

The program does nothing to increase security, and is in fact a “pre-approved bailout for insurance companies, the essence of corporate welfare,” which “[encourages] insurance companies to avoid the proper pricing of coverage.”

Similarly, the National Flood Insurance Program (NFIP) is in need of reauthorization and reform.  Here again, the goal would be the eventual move of the entire program to the private sector.  Reform would entail, in part, having owners pay “an appropriate actuarial premium rather than subsidized rates,” which would encourage private insurance companies to enter the market.

The Volcker Rule is in vital need of reconsideration.  David John has weighed in on this as well explaining that “if this rule stays in place, there may be a number of “severe unintended damage for the U.S. financial system and many other types of businesses both here in the U.S. and overseas.”

The major problem with the Volker Rule is its egregious lack of clarity.  Neither banks nor regulators understand the regulations implicit in the Volker Rule and “the rule will continue to cause serious uncertainty about the structure and services provided by banks for at least the next two years,” according to John.  The purported purpose of the Volker Rule is to “make banks safer by prohibiting them from owning or investing in hedge funds or private equity funds or from any “proprietary” trading.”

The goal was to ban trade by banks that was not being done on behalf of a customer; however, it is often difficult to make this distinction.  This archaic system, which is a “step toward putting banks back into the limited roles that they had 50 and more years ago,” will cause increasingly more damage to our financial system until this part of Dodd-Frank is repealed.

The Volker Rule is not the only defunct and misguided aspect of Dodd-Frank.   Heritage refers to this statute as a “regulatory mess” and a “hijacking of the financial sector.”  It fails to fix the problems it was intended to fix and in fact exacerbates many of these problems.  It allows for more bailouts to big banks, not less.

Moreover, Dodd-Frank comes with crippling costs, which are comprised of, among other things, a vast array of new fees, increased consumer costs, higher costs to homeowners, and higher bank fees.  Finally, under Dodd-Frank, the “Consumer Financial Protection Bureau has been granted unparalleled powers without accountability,” the legislation is very vague, and it grows bureaucracy unnecessarily.

In a similar vein, section 404 of the Sarbanes-Oxley Act should be repealed in order to create jobs, according to Heritage’s David S. Addington.  The law was intended to “enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of the auditing profession.”  Addington explains, however, that portions of this law created a vast increase in government regulation of the economy that stifles business.

Finally, the Financial Services Committee must implement housing market reforms.  Heritage suggests that Fannie Mae and Freddie Mac must be shut down.  David  John explains:

“The housing crisis that continues to affect housing prices across the country is due in large part to the activities of two special government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac. In the years since housing prices peaked in the second quarter of 2007, the value of household real estate has fallen by about $6.6 trillion[1]—30 percent—and it continues to fall. Real recovery is not likely until both Fannie Mae and Freddie Mac are replaced by a new housing finance system that does not include government distortions of the market.”

John outlines the specific steps that should be taken in order to undergo the delicate process of removing Fannie and Freddie from the housing market picture.

  1. Move Fannie Mae and Freddie Mac from conservatorship to formal bankruptcy.
  2. Repeal both entities’ perpetual federal charters and replace them with three-year charters that Congress may renew if necessary.
  3. Separate both portfolios of mortgage investments and turn them over for gradual liquidation to a new temporary subsidiary of the Federal Housing Finance Agency (FHFA) patterned on the Resolution Trust Corporation, which handled the assets of failed savings and loans in the 1980s and 1990s. Liquidation should proceed as the market allows, and neither entity would be allowed to make any further portfolio purchases.
  4. Reduce the conforming loan limits. These limits indicate the maximum size of the mortgages that Fannie Mae and Freddie Mac are allowed to purchase for inclusion in mortgage-backed securities.
  5. Increase the fee that is charged for a federal guarantee that mortgages will be repaid if they are included in bonds issued by Fannie Mae and Freddie Mac.
  6. Move all low-income housing goals and subsidies to the Department of Housing and Urban Development (HUD). Congress should then determine whether each of these policies should be continued or eliminated. Programs that are continued would be funded through the appropriations process.
  7. Sell remaining parts of Fannie and Freddie to private entities. Such sales would not be based on geography, and certain parts would be reserved for sale to small banks or credit unions or smaller mortgage bankers to reduce the chance of the business’s being dominated by large companies.
  8. Require continuing congressional oversight to monitor these changes and the development of a modern housing finance system.”

He also admonishes against the temptation to amend the problem of these huge GSEs by making “dozens of clones with the power to attach a government guarantee to their mortgage backed securities.”  This would result in the need for future bailouts that could cost the taxpayers billions of dollars.

Instead, that model should be scrapped and the aforementioned steps should be taken and should be approached taking into consideration of the delicate housing market’s slow recovery.  Heritage’s Nahid Anaraki explores Fannie and Freddie further and provides a perspective of what the housing market would have looked like in terms of home ownership rate and home prices without these two GSEs.

The Export-Import Bank of America, which gives taxpayer funded loans to foreign countries and companies, should not have been re-chartered.  It perpetuates crony capitalism and corporate welfare.  Moreover, it puts taxpayers in an increasing amount of risk as it grows.  Heritage Action has explicitly called for its removal.

All of these issues are of pressing importance to the economy and the future of America.  Accordingly, Heritage Action believes it is imperative that principled conservatives be placed on the House Financial Services Committee in the 113th Congress.  Conventional wisdom suggests Congressman Jeb Hensarling (R-TX) will be the committee’s next chairman, but he will need solid conservatives  on the committee if he actually wants to get things done.

 

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