True reform means ending 'too big to fail'

True financial reform must accomplish two things in my view: preserve the integrity of our nation's financial system and protect taxpayers from future bailouts.

The financial overhaul legislation put forward by Democratic Sen. Chris Dodd of Connecticut and congressional Democrats doesn't advance either of these causes.

Instead, the Dodd legislation would codify the notion of "too big to fail" and leave taxpayers on the hook for corporate bailouts in perpetuity.

The most hotly debated provision of the bill is the $50 billion so-called "resolution fund" to wind down failing financial institutions. But even if that provision were removed from the legislation, the new powers granted to the FDIC and Treasury would still create a de facto "too big to fail" climate. As House Minority Leader John Boehner said of the Dodd bill, the FDIC and Treasury have "got the ability to go in and bail out anybody they deem in need of it or anyone who is systemically at risk."

And it's not just Republicans saying this. Rep. Brad Sherman, a California Democrat, recently said, "The bill contains permanent, unlimited bailout authority."

Granting such sweeping policy-making authority to regulators is a fatal flaw in this legislation.

Additionally, like so many other pieces of legislation advanced by congressional Democrats to expand federal power under the guise of "reform," the Dodd bill is a job killer. The National Federation of Independent Business, in a letter to Congress, had this to say about it: "Addressing the problems in the financial services sector makes sense, but such regulations should not overreach to include small business or leave small business paying for the excess of companies deemed too big to fail." With unemployment at 12 percent, the last thing we should do is pile more regulatory and financial burdens on our job-creating small businesses.

Finally, conspicuous by its absence from the Dodd bill is any effort to revamp and reform Fannie Mae and Freddie Mac. There is no such thing as real reform that will protect U.S. taxpayers and 8th District families from the calamities of the last few years without reform of Fannie and Freddie.

I support the bill by Texas Republican Rep. Jeb Hensarling - the Government Sponsored Enterprise Bailout Elimination and Taxpayer Protection Act - which would set a two-year expiration date for the conservatorship of Fannie and Freddie, after which they would enter a three-year transitional phase that would impose steeper capital requirements and more stringent curbs on their mortgage activities. I also support New Jersey Republican Rep. Scott Garrett's bill to include Fannie and Freddie in the federal budget so there is an accurate accounting of their activities.

I also support a slew of other provisions in the Senate Republicans' alternative to the Dodd bill introduced last week including: tighter limits on the Fed's emergency lending power, a more transparent regulatory framework for over-the-counter derivatives, new underwriting standards for residential mortgage, and a reorganization of the SEC to enhance its enforcement efficiency.

The bottom line is the "too big to fail" philosophy of the Washington political class creates unacceptable moral hazards that encourage both public sector and private sector actors to take risks they otherwise wouldn't take because ultimately U.S. taxpayers bear the responsibility. Not only is it wrong, we cannot afford it.

• Joe Walsh is the 8th District Republican nominee for Congress.