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Patrick Delaney

, Star Tribune

ABOUT THE AUTHOR

Patrick Delaney, formerly a corporate and securities law partner at a Minneapolis-based law firm, is a corporate consultant and writer who lives with his wife, Kitty, in St. Croix Cove, Wis. His e-mail is Delaneyriver@aol.com.

Business forum: Regulation and tax equity protect free markets

  • Article by: PATRICK DELANEY
  • February 19, 2012 - 5:20 PM

Congressional and industry opponents of financial reform and tax reform make two curious arguments.

They insist that the mere spectre of financial re-regulation and greater tax burdens for the wealthy have reduced business profits and created a climate of uncertainty that discourages hiring.

So far they have succeeded in delaying implementation of the Dodd-Frank financial reforms and stymied reasoned discussion about making taxation fair to the broad middle class of Americans.

The profits degradation argument is demonstrably false. Business profits boomed in 2010 and 2011. While it is true that the bottom-line results of banks have settled down from their feverish pace earlier in the decade, this hasn't been due to the reality (or threat) of regulation or taxation, but to a wide range of domestic and international economic problems.

Regarding hiring, anyone who has ever been involved in business decisionmaking knows that neither regulation nor possible tax increases determine whether a business will add or replace employees. Hiring is driven by demand for goods and services, and the business imperative to create earnings and profits by filling that demand.

Our free enterprise system has always involved a mix of stimulation of business growth tempered by government regulation needed to protect the public good. Only economic confusion and stagnation can result from embracing unsupported claims that free enterprise must be untrammeled by any government regulation.

Thus, several months of wrangling in 2011 caused by pointless and unprecedented conservative opposition to raising the national debt ceiling moved the ratings agencies to lower our government's credit rating and diverted attention from our country's economic problems.

Restoring health to our economy will depend on renewed government and private-sector hiring, reinvigoration of the American housing market, tax fairness reform, and re-regulation of the American financial system to prevent another financial crisis.

The 2008-09 crisis was enabled by three improvident government actions:

•Repeal in 1999 of the Glass-Steagall Act, which since the Great Depression had served to protect against the exposure of commercial bank customers' funds to the trading risks of investment banks.

•Relaxation of regulatory strictures on the use by banks of financial leverage.

•Deregulation of derivative securities issued to finance pools of residential mortgages.

The credit and liquidity crises that followed raised the need for an overhaul of our financial regulatory system.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in June 2010. But its implementation has been delayed by financial industry lobbyists and conservative members of Congress through a breathtaking series of cynical tactics, including a fierce lobbying effort conducted at a cost estimated at hundreds of millions in 2010 and 2011.

Their lobbying is virtually unopposed because there are no mechanisms or funds to engage paid spokespersons for the public interest.

Among other things, the huge squadron of lobbyists -- an estimated 400 lawyers, accountants and economic consultants hired by the financial industry -- have caused introduction of more than 40 bills in Congress seeking to delay or defeat Dodd-Frank. At the same time conservative congressmen have cut the budgets of the federal agencies charged with the act's implementation. The lobbying of the financial industry threatens to leave us with Dodd-Frank Lite.

But the act seeks to allay the harm caused by repeal of the Glass-Steagall Act firewall between investment and commercial banking through the inclusion of the so-called Volcker Rule, whose purpose is to forbid banks from using their own (and thus customers') funds to engage in proprietary trading.

This rule, named for its champion -- former Federal Reserve President Paul Volcker -- would serve as a significant protection to banking customers and would impose a practical limitation on the extent to which banks could be, or could become, too big to fail.

Unfortunately, many exemptions to the Volcker Rule appear to be headed for adoption and will make it less effective and more difficult to interpret and defend. Paul Volcker has complained that his original 13-page, straightforward proposal has become a hydra-headed monster about 300 pages long and correspondingly short on enforceable meaning.

Unless Congress follows the Obama administration's urgent call for financial reform and tax fairness, we run the risk of another financial crisis and a deeper recession. That risk must be viewed as a severe threat to the United States and, in turn, to all the economies of the world.

We cannot allow such a risk to be taken without violating our society's duty to place first in our order of priorities individuals and small businesses, who have little voice in the lobbies of the government but who have the absolute right to be treated fairly.

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