June 17, 2009
Obama's new financial regs - worse than we imagined
Hey kids! Let's create a brand, spanking, new federal bureaucracy to protect consumers of mortgages, credit cards, and other financial instruments from their own stupidity!
That's just one of the nanny state goodie being proposed by the Obama administration to address what they say were the causes of the financial meltdown.
Some of those "causes," according to this piece by Binyamin Appelbaum and David Cho of the Washington Post, are remarkable for the ideological basis on which they have been analyzed:
The plan seeks to overhaul the nation's outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building.
The White House makes its case for this approach in an 85-page white paper that describes the roots of the crisis. Gaps in regulation allowed companies to make loans many borrowers could not afford. Funding came from new kinds of investments that were poorly understood by regulators. Big firms paid employees massive bonuses, while setting aside little money to absorb potential losses.
Surely some loans were made by criminals. The laws are already in place to deal with them. But how can you close a "gap" in the stupidity of the borrower? Never fear, the government is here!
The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.
We welcome our ACORN overlords.
I might also mention that, anyone who has the idea that the banks could have been saved from trillion dollar losses by not paying employees "massive bonuses" is being disingenuous at best and, at worst, is an idiot. The couple of billion that would have been saved from not paying big bonuses would have made absolutely no difference whatsoever - even if the companies had set aside all of that cash to "absorb potential losses."
Regulating executive pay and bonuses is an excuse to exercise power - nothing more, nothing less. There is no financial, regulatory, or business reason to do so but rather, it is a political power play by the government against those they perceive as having too much.
What else would this regulatory strait jacket do?
The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.
It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.
Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.
Those last two proposals aren't catastrophic (depending on how the regs are written). Clearly "too big to fail" has to be removed from our political lexicon. And considering how derivatives traders kept churning all that worthless paper, the idea of someone keeping an eye on them should not cause us too much angst.
The problem, of course, is vastly expanding the mandate of the Federal Reserve - to give the quasi-independent agency regulatory power not answerable to Congress. If you're a company and have a complaint about how the Fed is regulating your business, I wish you good luck and bon chance. You will get no satisfaction from our lawmakers.
This is a nightmare for those who value free, independent markets. And it might get worse yet. Interpreting these broad goals will be the job of federal regulators who may take the opportunity to impose even more draconian restrictions.
I don't want to seem apocalyptic in my analysis, but frankly, I see no other end result from these regulations except the loss of American pre-eminence in world finance. What set us apart from other nations was the freedom enjoyed by companies large and small to generate capital for investment, for business and job creation, and for new industries and technologies. Obama will mostly destroy that. Risk taking will be frowned upon, perhaps even made illegal in some ways. It was that risk taking by entrepreneurs, financiers, markets, and investors that greased the wheels of capitalism and created a financial system where the entire world was welcome to join in the joy of wealth creation.
Goodbye to all that.