Economic collapses, for lack of a printable word, are not good. Candidates in the 11th Congressional District both agree Wall Street reform is needed in the wake of the collapse. But Democrat Bill Foster has philosophical differences with Republican Judy Biggert on how that reform should occur.
For Foster, the reform package is already on the books. The answer to preventing the events that caused the economic crisis is known as Dodd-Frank, legislation signed into law in 2010 after a largely partisan vote. The law creates a slew of new financial regulations and government agencies to oversee the conduct of banks and other financial institutions.
"The Dodd-Frank bill, had it been enforced in the last decade, would have prevented the financial crisis," Foster said. "It would have prevented the enormous housing bubble, the bursting of which is still causing so much pain in people's lives."
Foster said Dodd-Frank already has resulted in banks no longer being as leveraged as in the past and no longer engaging in risky lending practices that caused the housing collapse. The new Consumer Financial Protection Bureau created through Dodd-Frank will protect the public in the financial sector in much the same way the Consumer Product Safety Commission guards the public in the retail sector, Foster said.
"The average American is not going to test every toy that they let their children play with for having lead paint in it," Foster said. "They depend on the government to ensure that unsafe products are not introduced into the market. The same should apply to things like credit card agreements and incredibly and deliberately complicated mortgage agreements."
Perhaps most importantly, Foster said, Dodd-Frank ends the notion of "too big to fail." There will be no more bailouts for failed financial institutions that result in the company surviving.
"If you trigger emergency government support, your shareholders will be wiped out, and the failed institution will be cut up into little pieces and liquidated."
Foster said Republicans want deregulation, which will only lead to repeating the mistakes of the past. But Biggert said Democrats have overreacted to financial crises and swayed too far in the opposite direction toward over-regulation.
"Dodd-Frank was not the answer," Biggert said of the need to reform Wall Street.
She doesn't believe more regulation equals better regulation. Consolidation of the regulators, so that everyone is aware of common problems and works to solve them together, is a better model, Biggert said.
"In contrast, Dodd-Frank gave more power to the regulators who had failed to prevent the collapse in the first place," Biggert said. "It rewarded the regulators who were asleep at the switch: the feds, the treasury, FDIC and the SEC, and gave them more power."
But with the additional power, and more than 400 new regulations, there was nothing in Dodd-Frank to reform the government-run housing programs, such as Fannie Mae, that endorsed the risky lending and apathy toward government-guaranteed mortgages, Biggert said.
Even worse, and in direct contrast to Foster's perspective, Dodd-Frank does nothing to end the too-big-to-fail bailouts.
"Dodd-Frank really enshrined the bailouts," Biggert said. "It designated what financial firms would be too big to fail. It gave the FDIC the power to seize and wind down those firms. But if they were to do that, they would have to borrow up to the value of these firms from taxpayers. Some of these firms are valued at $2 trillion."
Biggert said local community banks must now suffer from all the new regulations and compliance costs brought on by the practices of the too-big-to-fail institutions. The result of that suffering is red tape that's slowed access to credit, she said.
But the I-told-you-so moment on Wall Street reform may be just around the corner for Foster, Biggert and their fellow party members. The multibillion-dollar losses recently by J.P. Morgan will now be the subject of congressional hearings. What Congress learns may reveal if the financial sector has learned from its mistakes. Foster points to the need for the investigation as potential evidence for regulation of the market. But Biggert said it's too soon to say what happened with J.P. Morgan or if any securities or banking laws were broken.
"We're not rushing to make judgment," Biggert said. "But they survived. It's a private company, and it wasn't that they had to be bailed out."