Regulation Nation

Regulation: The White House wants to impose sweeping new rules for the financial industry to prevent another meltdown. Unfortunately, it was government — not the private sector — that was to blame.

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Citing a "culture of irresponsibility" that it says helped cause last year's financial crisis, the White House on Wednesday released an 88-page report that proposes major changes in America's financial system. The Associated Press aptly called it "the greatest regulatory transformation since the Great Depression."

Among the reforms put forward were a new, pumped-up Federal Reserve with greater powers to regulate and oversee the entire financial system, a new consumer credit watchdog to oversee home loans and credit cards, and new rules and oversight for hedge funds and exotic securities, such as credit default swaps and collateralized debt obligations, which some blame for making the financial crisis worse.

It's nice to see that our government is so concerned about not repeating the errors of the past. But our advice comes from an ancient proverb:

"Physician, heal thyself."

The White House's financial regulation proposal blames "gaps in regulation" for our financial crisis. Wrong. It was in fact government misregulation and miscalculation that created our financial crisis — not private businesses. The record on this is quite clear.

As economic historian Lawrence White of the University of Missouri has written:

"The expansion in risky mortgages to underqualified borrowers was encouraged by the federal government. The growth of 'creative' nonprime lending followed Congress' strengthening of the Community Reinvestment Act, the Federal Housing Administration's loosening of down-payment standards, and the Department of Housing and Urban Development's pressuring lenders to extend mortgages to borrowers who previously would not have qualified."

Add to that Fannie Mae and Freddie Mac — created and regulated by acts of Congress — which together at one point controlled nearly half of the nation's $12 trillion mortgage market. The two quasi-private entities served as the grand financial engine by which Congress would boost homeownership.

It worked well for a while. And we can't fault the intent to help people. But the failure was one of too much government — not too little, which is the rationale for the new financial regulation regime sought for Wall Street and the banks.

As for the Fed's new powers, we happen to believe the central bank has done a reasonably good job responding to this crisis — though as many others have noted, the vast expansion of the U.S. money supply in the last year poses a future inflationary threat.

But we don't think the Fed needs enhanced powers. Far from it. It's too powerful already. Giving it virtually unbridled control over our financial system without having to directly answer to the people is a danger to free market capitalism.

Many have argued that the Fed's slashing of interest rates from 6.25% in 2001 to 1% in 2003 — following a stock market meltdown, a recession, the 9/11 attacks and the start of the War on Terror — was too much and led to the housing market bubble.

Now, strangely, many of the same people advocate giving the Fed even more power. It makes no sense.

If the White House really wants to fix our ailing financial system, it would do well to start by repealing what remains of TARP, undoing the government's takeover of our auto industry and halting the fraudulent and wasteful $787 billion "stimulus" program.

Then you might see a real economic recovery take place.