By JEB HENSARLING
As Published in USA TODAY October 30, 2009
As any good doctor will tell you, if you get the diagnosis wrong, you get the remedy wrong. The proposal from the Obama administration and Financial Services Committee Chairman Barney Frank to deal with systemic risk in our economy certainly confirms the wisdom of that statement.
More than any private sector actor, the federal government created systemic risk through its efforts to cajole or mandate banks to lend money to people for home purchases they couldn't afford — particularly through Fannie Mae and Freddie Mac. Loans enabled by these government-sponsored enterprises (GSEs), coupled with ones insured or required by government programs, account for nearly two-thirds of bad mortgages.
Fannie and Freddie were able to operate beyond market-based standards because everyone thought they were too big to fail and would be bailed out by the federal taxpayer. This belief became reality last year when they collapsed, and taxpayers were stuck with $1 trillion in bailout liabilities.
Instead of learning from their collapse, the Obama-Frank bill creates new Fannies and Freddies by implicitly promising bailouts for institutions it deems too big to fail. This ignores the simple truth that the only way to end taxpayer-funded bailouts is to end taxpayer-funded bailouts.
Under the leadership of Rep. Spencer Bachus, House Republicans developed a comprehensive plan to end bailouts and force management and investors to face the consequences of their mistakes — no matter how politically well-connected they are. Our plan creates a new chapter of the bankruptcy code to deal with large, non-bank financial firms, placing impartial bankruptcy judges in charge of resolving failed institutions.
It also sets up a new oversight board of existing regulators to identify risks to the stability of our financial system and set capital standards for banks that will honestly cover their actual level of risk. These ideas are so common sense that versions of them are included in the Obama-Frank bill.
Where the Obama-Frank bill falls short, the Republican reform plan eliminates the concept of "too big to fail" and the threat of recreating the GSEs, while ensuring that taxpayers won't foot the bill for a bailout when a company fails.
Rep. Jeb Hensarling, R-Texas, serves on the House Financial Services Committee and is the only member of Congress on an oversight panelfor the Troubled Asset Relief Program.
###