A Nightmare On Wall Street
Regulation: Washington is quietly preparing a hostile takeover of Wall Street with a new bill that would put regulators in control of managing asset prices.
While all eyes are fixed on the cobra poised to strike the health care industry, a python is wending its way through Hill banking panels that would squeeze the life from the whole economy.
By Christmas, House Financial Services Committee Chairman Barney Frank hopes to pass legislation that would create an uber-regulatory body called the Financial Services Oversight Council.
It would give the Treasury secretary power to pick which large finance firms are "systemically critical," or too big to fail. He'd have the final call when the government steps in to save or unwind a troubled firm.
The bill would "essentially turn over control of the financial system to the government and seriously impair competition in all areas of finance," says former Treasury official Peter J. Wallison. It would put the government permanently in the business of picking winners and losers, he adds, creating a kind of permanent TARP.
The Kansas City Fed agrees. In a rare public rebuke, the branch issued a study concluding the bill "could lead to greater political interference." Indeed, such heavy-handed regulation would breed corruption, loopholes, lobbying and the very kind of perverse incentives and distortions in the market that led to Fannie and Freddie securitizing $1 trillion in bad social loans. "It's Fannie Mae and Freddie Mac all over again," said Wallison.
The new regulatory agency can regulate banks, bank holding companies, insurance companies, hedge funds, finance companies and any other kind of company that might be designated too big to fail.
"The existence of these designated companies will impair competition in every market they are allowed to enter," says Wallison, "and will force the consolidation of competitors so that markets become dominated by government-backed giants like themselves."
Under the new regime, designated companies will not be able to finance their affiliates' sales, putting them at a severe disadvantage against foreign competitors. GE Capital, for example, would not be able to finance GE sales of aircraft engines.
In effect, designated companies will fall under the control of the feds, unable to start new activities or enter new markets or perhaps even open new offices without federal approval. "This is a degree of political control of business that has never been attempted before," Wallison says.
And with politics comes favoritism. Bailouts and preferences will go to favored firms, and healthy companies will pay for the cost of propping up their sick competitors. Bad decisions will be rewarded, draining taxpayers. And once the market comes to expect that government takeovers and bailouts will occur, they will have to go forward, lest surprises trigger market crashes.
It will be a political free-for-all. R&D money devoted to new product lines and innovations will be shifted to lobbying. Before long, Wall Street will operate like K Street. Crony capitalism will be the name of the game.
"Washington and the political system - rather than competition and effective financial performance - will have become central to what happens in the financial industry," Wallison says.
In short, the regulatory regime Democrats want would be disastrous for future economic growth and living standards.
"Governments that regulate away risks destroy the growth engine of their nation," warns Swiss money manager Axel Merk. "The U.S. is the most prosperous nation because it has embraced risk taking. When we evaluate our love-hate relationship with investment banks, let's not forget that as one of their key roles, they facilitate the aggregation and deployment of risk takers' capital."
Democrats call that "greed" and are hellbent on tinkering with the American growth engine. Senate Banking Committee Chairman Chris Dodd is close to releasing a companion bill to Frank's.
The pair of New England liberals are the chief congressional architects of the regulations that created FrankenFreddie and FrankenFannie and the banking disaster that caused the Great Recession. Now they have license to create a new monster - with President Obama's full blessing.
If we are seeing a far-left coup against capitalism in this country, this bill could deliver the death blow, marching Wall Street down a road to serfdom in the name of "social justice."