Dissenting View of Ron Paul on the Financial Services Modernization Act of 1999
Dissenting View of Ron Paul on the Financial Services Modernization Act of 1999
(J. Bradley Jansen was Ron Paul’s legislative staffer for these issues at this time)
Dissenting View of Ron Paul on the
Financial Services Modernization Act of 1999
Financial modernization is an important issue, and reform is long overdue. Arbitrary and artificial government interventions in the market distort the natural economy. This distortion limits consumer choice and raises costs on businesses. “Modernization” legislation should first “do no harm” and then seek to undo the previous governmental interventions. This bill fails that test: not only is it not a deregulation bill, it is in fact a reregulation bill.
In order to allow for the market to function properly–and to internalize properly the risk that businesses choose to take–governmental regulations should be relaxed not increased. Federal banking regulations and other restrictions stifle the dynamic growth of new financial products and services that are fundamental to enhance the success of the U.S. financial services sector.
Genuine financial modernization would allow and encourage the introduction and development of new financial service products and structures not restrict financial providers’ current activities and eliminate present structures. As new hybrid financial service products are developed in response to market demand, government should not thwart the consumer’s ability to enjoy these new products.
Instead of relying more on private market regulation and deferring to state regulation of insurance, this bill would enhance the power of Federal regulators over the market. By mixing banking and commerce and increasing the scope of Federal banking regulators, including the Federal Reserve, commercial enterprises will come under greater governmental supervision. The result will serve to stifle the innovation that is the intended purpose of this bill.
By substituting the original Paul-Campbell amendment number eight (which would have removed any requirement that banks monitor the legality of transactions of their customers) for the Baker-Barr amendment, the bill does not take a strong, free market stand in favor of respect for financial privacy. As the current uproar over the proposed formal “Know Your Customer” rule has demonstrated, the American people expect the government to respect their–not use unwilling intermediaries to spy on them. Over a quarter of a million Americans told the regulators in no uncertain terms that the government should have access to this information only through a search warrant. They do not want an informal requirement such as the existing Bank Secrecy Act’s compliance manual from the Federal Reserve.
The Law Enforcement Alliance of America supported the original Paul-Campbell amendment:
“[Removing existing requirements] would in no way impinge efforts of law enforcement to investigate criminal activity…The pursuit of private information outside the traditional, time-tested, and court-approved law enforcement practices such as those proposed [KYC] will in fact have a deleterious effect on law enforcement’s ability to effectively prosecute its mission. Such intrusive measures will also infringe the privacy rights of law-abiding citizens while detracting from meaningful debate and discussion of measures that would improve law enforcement’s crime-fighting ability.”
Frances B. Smith, executive director, Consumer Alert, (Journal of Commerce, March 12, 1999), argues that we need to go back and revisit current laws, “Many large banks already have [Know Your Customer] programs that follow the nixed proposals. Consumers’ financial transactions will still be under surveillance until the laws on the books are challenged.” And others concur. “The American Bankers Association on Monday urged regulators not only to the withdraw their proposed know-your-customer rule proposal but to dismantle existing requirements” (American Banker, March 9, 1999).
The California Bankers Association web site explains clearly, “There is no precedent whatsoever to match what is being proposed–for a private nongovernment entity to be required to continually monitor ordinary citizens to actively enure the legality of their unregulated activities [banking transactions]…It is not unlike requiring telephone companies to identify customers and monitor their customers’ calling patterns to ensure no commission of crimes through the wires.”
The American Bankers Association June 1998 report Financial Privacy in America: A Review of Consumer Financial Services Issues reads,
“In sum, the citizens of the United States are not only well-protected, but increasingly well-informed and aggressive in addressing perceived risks to their personal privacy, in making choices about data privacy, and in insisting that these choices are respected,” the ABA report reads. “Technology enables businesses to make sense of vast stores of information by providing consumers with new and better products and services, particularly, the ones that consumers are likely to find attractive. Businesses collect consumer information in an effort to deliver new services and products that consumers want. This is the law of supply and demand. For businesses to succeed, they must satisfy consumer needs and demands as efficiently and accurately as possible. This is a ‘market’ check on privacy.”
Many other groups agree. Norman Willox Jr., president and chief executive, National Fraud Center, (“Know your cyber-customer,” Journal of Commerce, February 4, 1999), writes “We also encourage the administration to continue to recognize the importance of self-regulation in this complex area, and we commend it for its efforts to allow industry the opportunity to develop and implement such self-regulatory programs needed if we are to see a thriving e-commerce.”
The Privacy Act of 1974 made clear that there should be no problems adopting this amendment, “It shall be unlawful for any Federal, State or local government agency to deny any individual any right, benefit or privilege provided by law because of such individual’s refusal to disclose his Social Security number” Yet government requires bank tellers to circumvent rational expectations of consumer privacy.
While the bill does allow for greater flexibility of some structures and activities, it does so in an arbitrary fashion. The reforms that this bill makes do not sufficiently address the safety and soundness of deposit insurance and the payments system and, ultimately, taxpayer liability.