How to Fix the Financial Sector

As markets and businesses take corrective action themselves for the excesses of the past few years, there are things that Congress can do to address some of the root causes.

• Privatize Fannie and Freddie: Fannie Mae and Freddie Mac should be privatized once and for all. For too long, they operated on a twisted premise that profits should be kept for themselves and the burden of potential losses placed on taxpayers. Congress should set an enforceable timeline for the breakup of Fannie and Freddie. As private entities, they’ll be free to succeed or fail on their own.
• Prosecute Corrupt Officials: Fannie Mae and Freddie Mac spent almost $200 million on lobbying and campaign committee donations over the past decade, which surely helped get elected politicians to look the other way when the two entities were committing massive accounting fraud. Those who participated in these scandals should be investigated and, if evidence warrants it, prosecuted to the fullest extent of the law.
• Suspend Destructive Accounting Rules: Many institutions whose cash flow would allow them to weather the current storm are being driven to ruin because their assets are temporarily deflated by a flagging housing market and federal rules won’t let them account for those conditions. Suspending mark-to-market accounting rules for these entities until they can be re-written will assist some on the brink of insolvency and will provide a more accurate picture of an asset’s value to the organization.
• Repeal the Community Reinvestment Act: The CRA has contributed to the pile of loans to individuals who cannot afford to repay them. It should be repealed so that banks won’t feel compelled to lend to borrowers without sufficient credit or income. If Congress believes racial discrimination is an issue, it can and should utilize existing civil rights laws to protect Americans.
• Clean Up the Tax Code: It sounds like a cliché, but cleaning up our Tax Code so that it treats everyone and everything consistently can help to prevent this kind of catastrophe in the future. Repealing popular items like the mortgage interest deduction and replacing the current system with a simpler alternative isn’t likely in the near future. Still, there are actions Congress can take to make sure the law doesn’t distort behavior the way it does now.

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