Bloomberg’s Caroline Baum isn’t convinced the Fed can be the all-knowing “systemic risk regulator” the Obama administration wants it to be:
In other words, the same folks who missed, or did nothing to prevent, the worst crisis since the Great Depression will definitely, absolutely, positively be able to anticipate the next one. Uh-huh.
It gets worse. Instead of eliminating the doctrine of “too big to fail,” which encourages risky behavior because of perceived government backing, the Obama plan defines, institutionalizes and expands on it.
“All systemically important companies will be subject to enhanced regulation,” says Peter Wallison, senior fellow at the American Enterprise Institute, a conservative Washington think tank. “What could that possibly mean? It means they are too big to fail.”
Previously the determination of who was and wasn’t TBTF was in the eye of the beholder: It had to be inferred.
This past year, the federal government took the guesswork out by designating Fannie Mae and Freddie Mac, 19 of the biggest banks, tw
o car companies and one insurance company acting like a hedge fund as charter members.
So the plan doesn’t fix key regulatory problems that helped cause the current mess, and then (by making too-big-to-fail more explicit, for instance) makes other problems even worse. Nifty.
And one other thing: this notion that regulators should have the power to seize any institution, even a non-bank, it deems systemically important is a potential disaster.
Not to be melodramatic, but if the feds could do that now, what would keep them from using the seizure threat as a way to, say, induce banks to make imprudent loans to the administration's political allies? (And in times of non-crisis, furthermore, the temptation to medddle would only be stronger.) And don’t say that the administration wouldn’t dare interfere in the regulatory process that way. Just look at the Chrysler bankruptcy.
I'm at a loss to understand why people aren't squawking. . . .
