Making Sense, by Michael Reagan

As President Obama pushes for stricter regulations on Wall Street institutions, I want to call us back to caution. Undoubtedly, we should learn from past mistakes and forge a path through to prosperity and an understanding of proper limits on the dangers associated with potentially catastrophic lending and investment practices. But without appropriate caution, we will jump the gun with an over-expanded and unjustifiably influential federal government in the financial sector.

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It is imperative that we look at our past to truly understand how we got here. And we need not look further than the Carter administration’s Community Reinvestment Act of 1977 for the answer. That act required banks to lend to un-creditworthy borrowers, mostly in underprivileged and minority communities.

While the concept of putting more Americans in homes comes across as a “feel good” policy, the fact of the matter is that these types of policies saddle families who don’t have the income or earning potential to meet their payment obligations, leading to foreclosure and displacement.

This type of enabling legislation, coupled with predatory lenders and institutions, including those under federal government control, who would push potential investors into home-buying and other schemes for which they were not fiscally viable, formed an all-too-powerful formula that led to an almost paralyzing economic bust.

Democrats in Washington have looked at this scenario as a political opportunity in the run-up to the midterm elections. Without acknowledging the complexity or history of the issue, they hope to score easy points with a hit on Wall Street and the promise of reform. But insensible reform is nothing but reckless.

Last week, all 41 Republican senators, under the leadership of Mitch McConnell, signed a letter stating their opposition to the current version of the “Wall Street reform bill.” If needed, this type of unity could stop the bill.

Key Republicans have declared their intent to use their unity as a negotiating position with which to improve the bill, rather than as a tool to kill it. Sen. John McCain said, “This one is a little bit different [than the health care bill]. We want to keep 41 votes together to have a negotiating position; on healthcare, we didn’t like any of it.”

This is the type of measured, strategic leadership we need in Washington. Promising bipartisan talks are underway, and if Republicans stay strong, we can see a way through to a reasonable reform which does not increase the size and influence of the federal government at the expense of the core components of our economy.

There are a few key provisions Republicans must continue to fight:

First, the suggested creation of a new “Consumer Protection Agency” to tighten government oversight is a blatantly unnecessary power-grab. Its proposed duties could be easily handled through existing agencies.

Second, Democrats are pushing for the creation of a $50 billion fund which could be used by the government to seize and dismantle large, failing financial agencies. This proposal only endorses “too big to fail” and institutionalizes the misguided bailouts of the past two years.

Third, Republicans must oppose a proposed tax on bank liabilities, to the tune of $90 billion over 10 years, which would be designed to help the government recoup losses from the recent bailouts. While Americans are entitled to recoup their lost tax dollars, placing a new tax on a weak financial sector is not the way to go about it.

Lastly, we can expect new regulatory standards for derivatives to soon be passed through committee. Abuse of derivatives must end, but the private sector rightly argues that these proposed regulations are too intrusive and restrictive and would harm America’s ability to compete internationally. More risky investments and sales would potentially be prohibited. We need smart — not smothering — reform on derivatives.

As Washington grapples with these important issues, and the president seeks camera time in our nation’s financial capital, it is important for us all to remember that the reforms of a past failing Democratic administration enabled the very issues over which they are now indignant.

Too-broad reform only serves as a mask for an expanded federal government and will ultimately lead to greater economic uncertainty and market paralysis. When it comes to market innovation, Americans will vote far more effectively with their wallet than through misguided and self-interested members of Congress.

More than ever, we need smart and realistic leadership, not another Washington power grab.

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Mike Reagan, the elder son of the late President Ronald Reagan, is spokesperson for The Reagan PAC (www.thereaganpac.com) and chairman and president of The Reagan Legacy Foundation (www.reaganlegacyfoundation.org). Look for Mike’s books and other information at www.Reagan.com. E-mail comments to [email protected].

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