The High Cost of Financial Reform--HR 4173 and the CBO

The title of this blog is "Paying for Protection: The High Cost of Financial Reform." Since the primary focus of reform has been HR 4173 and SB 3217, today we are going to focus on the costs of financial reform as it pertains to budgets, deficits, and the taxpayer.

On June 9, the Congressional Budget office released its cost estimate for HR 4173 (The Restoring Financial Stability Act of 2010) as passed by the Senate on May 20, 2010. A complete copy of the 30 page report is available at www.cbo.gov. The first page summary reiterates briefly the changes that will be implemented as a result of HR 4173, and it makes clear that all costs involved in enacting this legislation are not included in the CBO scoring model. For instance, the summary states that HR 4173 will change the terms and conditions of the FDIC programs guaranteeing financial obligations of bank and bank holding companies when there is a liquidity crisis. The CBO cost estimate includes the cost of repealing the FDIC's current authority but not the costs for creating the new program authorized by HR 4173 since that program would be created by another piece of legislation which would be scored separately.

The CBO is also frank about the fact that passing this legislation is not a guarantee of no future crises. "Under the legislation, as under current law, there is some possibility that, at some point in the future, large financial firms will become insolvent and liquidity crises will arise, and that those financial problems will present significant risks to the nation's broader economy. The cost of addressing those problems under current law is unknown and would depend on how the Administration and the Congress chose to proceed when faced with financial crises in the future; they could, for example, change laws, create new programs, appropriate additional funds, and assess new fees. Depending on the effectiveness of the new regulatory initiatives and new authorities to resolve and support HR 4173, enacting this legislation could change the timing, severity, and federal cost of averting and resolving future financial crises. However, CBO has not determined whether the estimated costs under the act would be smaller or larger than the costs of alternative approaches to addressing future financial crises and the risks they pose to the economy as a whole."

A glowing endorsement indeed--a piece of legislation which will create massive new bureaucracy with unprecedented powers over businesses, "could change the timing, severity and federal cost of averting and resolving future financial crises." So how much is this bill which may or may not solve the problem going to cost?

According to the CBO estimate, HR 4173 will increase revenues by $12.1 billion over the 2011-2015 period and by $33.5 billion over the 2011-2020 period. During the 2010-2014 period, HR 4173 is estimated to increase direct spending by $19.7 billion and net deficits by $10.6 billion. Over the period from 2010-2019 the CBO estimates that enacting HR 4173 will increase direct spending by $46.9 billion and net deficits by $18.3 billion.

In addition, implementation of the bill will impose mandates on the private sector and the states as defined under the Unfunded Mandates Reform Act. For example, states will no longer be able to tax and regulate certain types of insurance. The CBO does not have enough information to calculate the exact cost to the states or to determine whether the costs would exceed the threshold provided for in the Unfunded Mandates Reform Act which was $70 million in 2010. However, where the private sector is concerned, the CBO states that the cost of HR 4173 on private businesses will "significantly exceed" the threshold established by the UMRA for governmental mandates on the private sector, which is $141 million in 2010, because according to the CBO's report, "the amount of fees collected would be more than that amount."

So we have a cost of "significantly" greater than $140 million in fees and costs to private businesses, and deficit spending of $18.3 billion to be covered by the American taxpayer for a new bill which may or may not "change the timing, severity and federal cost of averting and resolving financial crises." Tomorrow we will look at how all of that money is going to be spent.