The economic crisis was caused by dumb home buyers doing business with greedy financial companies, abetted by politicians who were both dumb and greedy. Should we really look to Washington to prevent a repeat?
Sen. Christopher Dodd's financial reform bill, which landed on Capitol Hill on Monday, has some good ideas. But it also might add red tape and expense without making much difference, or even aggravate problems it's designed to solve.
Here are further thoughts, outsourced in part to Baltimore financiers. Yes, some of these folks have a stake in the fight. But, believe it or not, even financial professionals have been shocked by events of the last two years and want change. It's just a matter of what kind.
•By all means, require more money down - from home buyers, hedge funds and everybody in between. If you can't put up substantial "equity," you shouldn't be borrowing money, even (especially) if you're a Wall Street bank with a killer trading strategy. Solve the zero-down insanity, and many of the other problems solve themselves.
True, the switch by all major Wall Street houses to become bank holding companies reduces their borrowing power, regardless of what happens to the Dodd bill, notes T. Rowe Price Chairman Brian Rogers. But Dodd's move to potentially tie Wall Street's hands even tighter, especially as firms' size and risk increase, seems sensible.
•Pass "the Volcker rule" and make it stick. Named after former Fed chief Paul Volcker, the rule would prohibit or restrict taxpayer-backed Wall Street banks from gambling on markets for their own profit.
"Usually I come down more on the conservative side of things," says Timothy Chase, managing partner at WMS Partners, a Towson financial advisory firm. "But to me, it makes perfect sense. Why do I, as a taxpayer, want to guarantee some 24-year-old trading currencies up in New York?"
•Let the sun shine in on unregulated "hedge" funds and complex derivatives, such as credit default swaps, which are basically debt insurance. Dodd's bill would subject private funds and derivatives to exposure through industry-funded clearinghouses, similar to public stock exchanges.
"I'm a fan of having derivatives trade on exchanges, so at least you know what's happening with them," said Rogers.
But don't be overly prescriptive and underestimate Wall Street's ability to keep ahead of regulation.
"Historically, the investment community has been extremely innovative," said Steve Isberg, associate professor of finance at the University of Baltimore. "Rules tend to apply to things that exist. Very often, we don't discover the need for a rule until after we found out something exists" - and caused some disaster.
•Be careful of what you wish for in a Consumer Financial Protection Agency. The group would operate out of the Federal Reserve, the nation's central bank that has a reputation for political independence. But its overseers would be appointed by the president.
There's no reason a future president, swayed by Wall Street blandishments, couldn't appoint "pro-housing" CFPA directors who would allow another mortgage orgy.
"Will layering another bureaucracy on top of the existing bureaucracy protect consumers?" wonders Scott D. Reinhardt, a partner at Towson-based Passive Capital Management. "It might make people feel good. But I don't see how another layer of bureaucracy is going to solve anything."
•Give government clear authority and means to seize insolvent financial companies. The problem, as Rogers points out, is "who the heck's going to pay" for the losses. Financial companies will probably be taxed in some form, but the risk of catastrophic losses will almost certainly continue to fall on taxpayers.
Let's hope the other parts of the bill reduce the risk of catastrophes.
James Brady, Maryland's former economic development secretary and now a director of T. Rowe Price, McCormick and Constellation Energy, sees little to like in the Dodd bill.
"My feeling from the beginning is that this is one of those great government things that fall under the banner of 'Sounds good if you say it fast,' " he said. "From what I've followed up to now, I thought it was overkill and not necessary."
On the other hand, Kenneth R. Solow, chief investment officer at Pinnacle Advisory Group in Columbia and author of "Buy and Hold Is Dead (Again)," takes a more positive view.
"It's very comprehensive," he said. "I like most everything that's in there one way or another. I thought to myself, 'This bill is going to [anger] everybody, so it's got to be pretty good.' "
Well, not necessarily. But the bill seems to let Washington mend some errors and guard against future blowups without too many obvious side effects. In this political climate, maybe that's all you can expect.