How to Prevent Another Financial Crisis
By Rep. Maxine Waters, American Banker
In 2008 we saw the consequences of the risky, irresponsible lending and financial practices resulting from the false ideology that financial markets can somehow properly police themselves. Lax mortgage standards and an unhealthy amount of risk taken by financial institutions and other market participants led to an economy that was not rooted in reality.
The result was a series of events that left an indelible mark on our financial system, our housing market and our way of life as Americans. In a matter of weeks, a number of the largest financial institutions were at risk of failing. Only Lehman failed outright, but others were rescued from that fate by the benevolence of the American taxpayers. Some were pushed into hastily arranged mergers.
The American economy was pushed to the brink of collapse, wiping out the life savings of millions of Americans, drying up credit for families and small businesses, and touching off a foreclosure epidemic that continues to devastate states and communities nationwide.
The numbers speak for themselves. Nearly 9 million jobs were destroyed as the unemployment rate doubled. Foreclosures displaced more than 11 million Americans, which contributed to a decline in home values of more than 30%. All told, the financial crisis cost our nation more than $13 trillion in economic output – the equivalent of a year's gross domestic product.
While actions by Congress, the Federal Reserve and Department of Treasury eventually staunched the bleeding, it was clear that a massive reform of our nation's financial system was necessary to reset the economy and prevent a future crisis.
As a result, my colleagues and I in Congress passed Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank changed the paradigm for how consumers, investors and other market participants interact with our financial system. It has provided oversight to the financial sector, given regulators the tools to end the era of "too big to fail" entities and taxpayer bailouts, and put a new federal agency on the front lines of protecting consumers from bad actors in the financial system.
Throughout the debates, Republicans resisted, obstructing and opposing these efforts without offering any constructive alternatives. They continue to demagogue the issue to this day.
Five years later, we have made marked progress in turning the economy around. Unemployment is down, home prices are up and credit is available. But to guard us against the threat of another financial catastrophe, there is still much to accomplish.
First, we must make sure the economic recovery reaches the middle class and small businesses.
The Federal Reserve's current policy of asset purchases, known as quantitative easing, has been instrumental in reducing unemployment, bolstering the economy and keeping interest rates low. I applaud the Federal Reserve's recent decision to continue this program until there is more evidence that economic progress will be sustained. But to ensure a more robust economic recovery, we must move away from the current fiscal policy, which is proving counterproductive to that goal. This includes extending relief to those still facing foreclosure through the federal Home Affordable modification and refinancing programs, offering reductions in principal on mortgages that are backed by Fannie Mae and Freddie Mac, and encouraging options to make student loan repayment more manageable for struggling borrowers.
We should expand the Neighborhood Stabilization Program, a success story that provides funding for municipalities to purchase and redevelop foreclosed or abandoned properties so they don't further depress housing prices or lead to neighborhood blight.
Second, more needs to be accomplished to prevent future crises. We must be mindful of overburdening small banks and credit unions – the drivers of community development. However, in the three years since Dodd-Frank was enacted, about 60% of rulemaking deadlines have been missed. I join President Obama in urging the expeditious implementation of the remaining rules, supported by full funding for our regulatory agencies.
Third, we need a Federal Reserve chair who will continue the current policies of growth and finish the work of implementing Dodd-Frank. I continue to believe that our nation needs a candidate who understands the impact of the Fed's policies on the middle class and the crucial balance between stable prices and low unemployment.
Lastly, government must responsibly wind down Fannie and Freddie while ensuring stability in the housing market. As ranking member of the House Financial Services Committee, I am working on an approach that preserves the 30-year fixed-rate mortgage, maintains access for all qualified borrowers that can sustain homeownership and ensures access to affordable rental housing. It will also provide small institutions and community banks direct access to the secondary mortgage markets.
Rep. Maxine Waters, D-Calif., is the Ranking Member of the House Committee on Financial Services.