D.C. debate is whether to regulate or not

updated 2:31 p.m. ET April 20, 2008

WASHINGTON - A heavier federal hand is reaching into American life as politicians in both parties demand an overhaul of government financial regulation and more protection for homeowners in the face of mortgage woes and a weakening economy.

This rush to regulate also was apparent in the recent crackdown on the airlines, resulting in thousands of grounded flights for safety inspections as the government beefs up its enforcement of existing laws. There have been mounting proposals for tougher government rules to address climate change. High corporate salaries have come under attack on Capitol Hill, as have oil industry profits and rising food costs.

Advocates of more aggressive government action see it as a boon to ordinary Americans struggling in hard economic times. But those favoring a lighter federal touch worry that the pendulum will swing too far toward regulation, stifling economic growth and efficiency.

“There’s always that danger,” said Jack Kemp, former New York congressman, housing secretary in the first Bush administration and 1996 Republican vice presidential nominee. “We do have to be concerned about over regulation.”

But even the conservative Kemp, now an economic adviser to John McCain, has come down on the side of more federal involvement to help struggling homeowners. He argues for a plan — being advanced by the GOP presidential candidate — to help homeowners under water on their mortgages to restructure their loans. Lenders would have to write off part of the principal and, in exchange, the new loan would be backed by the federal government through the Federal Housing Administration. Designed to help 200,000 to 400,000 people, it is similar, if less ambitious, to plans supported by Democratic candidates Barack Obama and Hillary Clinton.

Ideology aside, “I want to keep people in their homes,” Kemp said in an interview.

Although President Bush a month ago urged Congress not to overreact to the housing crisis, he has since extended the Federal Housing Administration’s reach and empowered mortgage-finance giants Fannie Mae and Freddie Mac to make up to $200 billion more in loans. Treasury Secretary Henry Paulson, unveiled a “blueprint” to increase and consolidate regulation of the financial industry, giving more power to the Federal Reserve — and possibly creating a new financial-regulation agency with broad reach.

Regulation-overhaul proposals abound in Congress.

Allen Sinai, chief global economist for Decision Economics, said the calls for more regulation are a response to anger on the part of ordinary Americans at seeing the value of their homes decline and, in many cases being faced with foreclosure and an inability to refinance, while a big investment bank like Bear Stearns can be helped by the government.

“Our society does often over-respond to such anger with more regulation and it has interfered with the free working of the market,” Sinai said. “We need to get some balance — but we need a changed regulatory framework in the financial arena without a doubt.”

Washington policymakers have a history of being slow to recognize a brewing crisis and to let down their guard when times are good.

“Politicians are always cheerleaders on the way up,” then switch to hunting for culprits when the cycle changes, observed Lawrence Lindsey, a former Bush economic adviser.

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