07/09/2010 12:26 pm ET Updated May 25, 2011

Keep Your Eye on the Ball... When Legislating!

Every child learning a sport is admonished to 'keep your eye on the ball!' This advice has worked well for generations -- witness the huge contracts for A-rod, Mark Texeria, LeBron, Amar'e Stoudamire, etc., not to mention the earnings of Tiger, Phil and their cohorts on the PGA Tour. Even one of my golfing buddies is quick to tell me after a bad (every?) shot: "You picked up your head!" If only our lawmakers and regulators were told the same!

A look around the Washington scene in recent months indicates too many 'power players' who have used up their mulligans with forays into peripheral matters which do not benefit the country, while ignoring critical matters. The endless focus on social issues -- guns, abortion, gay rights -- is a perfect example of politicians obsessing over issues that, while they prompt great interest from a few, have little or nothing to do with the masses. Not a single job has ever been created by allowing or preventing a gay marriage or DADT in the military, yet at a time of huge economic dislocation, gay rights are a hot topic at every turn, whether in the Kagan hearings or directly with respect to military policy.

Similarly, one hears a great deal from the political class about the implications of last week's SCOTUS decision in the Chicago gun case (McDonald), but very little outside academic circles on the same day's decision in the business method patent case (Bilski), despite the latter having a major impact on innovation in our economy and the former being irrelevant to the economy and unlikely to be of much significance in the big picture with respect to anti-crime efforts.

Immigration is another topic which, while of genuine significance in southern border states, has little impact upon Americans elsewhere, but occupies a disproportionate share of the attention of the political class. In debates, the issue is so often presented as central to our physical and financial security when in reality it is neither. There is not a single documented case of an immigrant from the Western Hemisphere being involved in any crime which threatens our national security (i.e. apart from "ordinary" street crime) while there is little impact upon public services outside the border states and many jobs taken by illegal immigrants going begging. The issue certainly deserves attention on account of its impact on the border states, but in the appropriate context, and not as something which impacts the country as a whole like unemployment and terrorism.

More fundamentally, when one looks at a summary of the financial regulation bill which has just emerged from the conference committee, and was intended by all to reduce the likelihood of another meltdown, one is struck by the abundance of unrelated matters which are addressed and the total absence of any mention of Fannie or Freddie or the Community Reinvestment Act, which were undoubtedly major factors in the plethora of bad loans. At bottom, there is general agreement as to the principal factor in our financial crisis being the incurrence of excessive debt -- mainly, but not exclusively real estate related -- by individuals and businesses.

Yet the 2000 page bill, while it addresses this topic to some extent, by requiring verification of information presented in residential mortgage applications and limiting incentives to steer consumers into products which have been used in a predatory manner, and reforming credit rating agency practice, goes off the rails to address a multitude of topics which are not pertinent to the stability of the financial system.

Perhaps the most glaring example is the new limitation on fees which may be charged by banks to merchants for credit or debit card transactions. This matter is as relevant to economic stability as the use of the designated hitter in MLB, but has been made a key piece of the "reform" bill. Of course, any DH who takes his eyes off the ball like our law makers, would not be a DH for long!

We also see increased regulation of derivative securities trading, which may be defensible to the extent it impacts speculative activity, but as reported in the WSJ lead editorial of 7-6-10, will have a major impact on "end users" who are using such securities to reduce their risk and had nothing to do with the financial meltdown.

There is extensive discussion of the new consumer protection agency and provisions which are intended to "ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards and other financial products, and protect them from hidden fees, ...." Indeed the bill is known as the "Dodd-Frank Wall Street Reform and Consumer Protection Act". [emphasis added] Disclosure and consumer protection are beneficial in themselves, but the debt levels which we see are not the result of misleading information or high fees; they are the result of foolhardy, but voluntary decisions. Witness the problems in the commercial real estate sector, where sophisticated operators -- who presumably knew what they were doing -- made the same mistakes as Joe Sixpack. In any event, credit cards were not a major factor in the meltdown. Without dealing directly with irresponsible lending and borrowing, reliance on disclosure is insufficient.

Similarly, the new bill includes extensive regulation around derivatives trading and proprietary trading by financial institutions despite the fact that there is little or no evidence that such trading directly or indirectly caused the problems. While institutions which got into trouble and were bailed out may have engaged in such trading, the underlying problem was the debt behind such securities and not their packaging.

The bill also focuses on financial institution size in an effort to avoid 'too big to fail' situations. Laudable perhaps, but off target again: the problems are a function of poor management of large institutions and not their size per se. However, nothing is done directly about management and poor decision-making in large or small firms. Efforts to improve management accountability through enhanced proxy access and say on pay votes, while useful, do not attack the ultimate issue in the same manner as direct efforts to improve corporate governance.

A mulligan (or 7) won't have much impact on my golf score, but as a nation, we've used up our allotment and need to insist that our policy-makers always keep their eye on the ball.