Famous economist Adam Smith first used the phrase "the invisible hand" in 1759 and alluded to it- without mentioning it- in his landmark book, "The Wealth of Nations." Basically, it described the self-regulating behavior of markets. This is not a dissertation on classical economic theory or the writings of Adam Smith. Instead, this is about Section 342 of the Dodd-Frank Wall Street Reform Act which is actually a series of laws or acts brought under a single umbrella. As we have found out with Obamacare, the larger the law in terms of pages, words and breadth, the greater the chance for someone to slip something- usually a pet peeve or project- into the final piece of legislation. The problem becomes even more acute when those tasked with writing, analyzing, and reporting the bill to the whole Congress sit on the powerful committees. So it is with Section 342, the Dodd-Frank law, and Maxine Waters (D-CA).
Maxine Waters should be familiar to anyone with an interest in politics. She represents a California congressional district in Los Angeles- and not the nice parts. The district is 85% minority- blacks, Hispanics and a growing Asian community. Over 20% of the district's citizens live in poverty. Waters epitomizes the worst of racial politics. Her claim to fame in the California Assembly was divesting the state pension fund from businesses associated with South Africa. She found the riots in Los Angeles after the Rodney King verdict "understandable." She has supported efforts in Congress to pay reparations to African-Americans for slavery. She has referred to a mayor as a "plantation owner." There are likely more instances of Ms. Waters using race to advance her socialist viewpoints.
Waters is also no stranger to ethical lapses although she always seems to find a way out of them. The LA Times did a series of articles chronicling how her family members reaped benefits from companies aided by Water's congressional status. Of course, the most famous charge against her was that she helped OneUnited Bank- where her husband was a director- receive federal aid. The House Ethics Committee ultimately did not find violations, but the fact remains that her husband's bank did receive aid and that there was intervention by a member of her staff allegedly of which she was unaware. Hmmm... sounds sort of like a bridge lane closing in New Jersey except no federal aid is involved and there was no monetary benefit in New Jersey. But, I digress.
In the wake of the 2007-2009 financial collapse, there were not too many people who thought the banking system was not in need of reforms. Personally speaking, perhaps if the existing rules were being enforced by the regulators then in office the damage would not have been so great, deep, and painful. The immediate response was TARP under Bush which did not sit too well with many of us on the Right. Most likely, the relative success or failure of TARP will be debated for years to come. Regardless, pushed by Obama and the Treasury Department under Timothy Geitner, banking reform was pushed through Congress and became Dodd-Frank. It is kind of ironic that a banking bill would be named after two legislators who may have profited from that 2007-2009 financial collapse, but such is Washington.
There are loads of purported reasons for the financial collapse- greed, unscrupulous bankers, loans to people who had no right getting loans, Wall Street innovation through creation of devises like credit default swaps, etc. An article here on the causes would run thousands of words. The point is that the congressional response more or less codified the concept of "too big to fail" and did little to address one of the root causes of the financial collapse- the housing bubble and Fannie Mae/Freddie Mac.
As with other legislation of the size of Dodd-Frank, certain things get slipped in. Section 342 is just such a case and its inclusion is directly traced to Maxine Waters who sat on the committee one step below Barney Frank in terms of power. Section 342 mandates that any agency that regulates the financial system in the United States as well as anyone they regulate report annually on efforts to recruit, retain and promote women and minorities. In short, it is corporate affirmative action with the heavy hand of government behind it.
On its face, it seems innocuous enough. After all, they just have to report to Congress and the regulated have to report to the regulators. Unfortunately, we have seen this movie before. Even more unfortunate is the fact that these "reporting requirements" are usually later used by people like Maxine Waters to bully others into hiring and promoting minorities and women in order to illustrate they are complying with the affirmative action mandate. But it also begs the question as to why Waters and everyone who supported this section of the law would even want it included.
The only conclusion is that they somehow feel that minorities and women are under-represented in corporate board rooms or regulatory agencies, which may be the actual truth. But, how does forcing minorities or women into corporate board rooms or regulatory agencies help prevent another financial collapse, bank failures, greed, or whatever other reason you want to posit as the reason for the financial collapse? Are they supposed to bring some unique perspective to the entire regulatory framework? Contrary to popular belief, white males do not have a monopoly on greed. Nor do they have a monopoly on unscrupulous business behaviors or making bad business decisions. And as Maxine Waters knows intimately well, white males do not have a monopoly on stupidity.
This is very much like the Community Reinvestment Act (CRA) passed under Jimmy Carter. It sounded like a good law and rather innocuous at the time and was designed to encourage banks to locate in, cater to, and make loans to residents and businesses in minority-dominated areas. However, the CRA became less of a carrot and more of a stick and that stick got longer and thicker when politicians were using their influence behind the scenes. For example, banking mergers, acquisitions and expansions require approval of regulatory agencies. Under the CRA- although not explicitly written- in order to show compliance and get that regulatory approval, many banks increased loans to minority homeowners and businesses that may not have qualified under standard underwriting practices. The result was that bad loans were made simply to comply with the CRA and the subprime mortgage business exploded in growth. It also exploded in the face of every taxpaying American. The Federal Reserve may have concluded that the CRA played a very small, negligible role in the financial collapse and they are probably justified in the abstract. But, banks do not operate in the abstract.
Likewise today, in practically every article you read in favor of Section 342 they state that it is an innocuous provision, that it is merely a reporting requirement, that conservatives are seeing quotas where no mandate for quotas exist, etc. As stated earlier, we have heard these justifications before. If the purpose of Dodd-Frank was to reform the banking and financial industries and help prevent another financial collapse, then it should address only those factors that led to that collapse. It would be an incredible stretch of the imagination to assert that the lack of women or minorities in corporate board rooms or in regulatory agencies was a contributing factor. There will likely come a day soon when people like John Conyers or Maxine Waters will parade corporate executives before Congress and question why they lack women or minority officers in their corporate structure.
Personally, speaking of abstracts, I have no problem with affirmative action. Companies should recruit qualified (key word: qualified) minorities and women and, if their performance dictates, promote them. If it came down to a white male who scored a 65 on some hypothetical scale against a minority or woman who scored a 63, however, the white male should prevail. Of course, if the minority or woman scored higher than a 65, then they should prevail. And let's leave out giving women and minorities some leeway because of some alleged previous discrimination. As concerns affirmative action, it is often searching for diamonds in the rough. The problem is that sometimes there are no diamonds for whatever reason. Should a business be penalized because of a bad educational system, for example, or because someone shows up for an interview with their pants hanging halfway to their knees?
The bottom line is that Section 342 no more belongs in this law than do provisions regarding business transactions with the Republic of the Congo because of the blood diamond trade, or provisions regarding the reporting of mining safety violations, or provisions dealing with oil and gas companies reporting on payments for leases. None of these provisions have anything to do with sound, safe banking practices. Maxine Waters insisted on the inclusion of Section 342 merely to provide yet another tool for herself and those like her to socially engineer American society.