Caroline Baum: Obama's Regulatory Campaign Is Disastrous

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. . . .

Comments

[Angry Banker]

I agree that the Fed is ill-suited to be the master-regulator. I'm also concerned about the proposed new Consumer Financial Protection Agency. I think the concept is actually okay, but I fear the execution will be off the deep end. I have no problem with much clearer rules on disclosure, product suitability, etc., (actually it would be a godsend if done right), but the reality is that the new CFPA will probably become a tool of populist politicians who don't actually understand what it takes to run a business properly.

2009 Jun 24 09:31 AM

[diogeron]

The same people who almost brought down the entire financial system are now whining about initiatives to prevent this from happening again. Too bad. You brought it on yourself and until you can offer a better alternative to ensure protection of consumers from the reckless greed and incompetance of investment bankers, ratings agencies et al, then all I can say is, you'll have to learn to live with the new regulations.

2009 Jun 24 09:57 AM

[prairiedog555]

As a shareholder I hope legislation is enacted to curb the lavish perks and compensation for publicly traded companies. (private companies are different) As a shareholder I feel that they are stealing from me because I own a piece of that company. I have a hard time investing in US companies.

2009 Jun 24 12:07 PM

[Phil Trupp]

The bonfires of stupidity and greed of past eight years has nearly destroyed the world economy. Little wonder then that government seeks stabilization at any and every level of the financial system. There will be grasping at straws and many missteps in the panicky attempts to reconstruct the broken economy.

Meanwhile, Angry Banker (above) fears what he calls "populist politicians," presumably those now in the majority in Washington. But in the broader sense all politicians are populists stroking their constituencies in order to be reelected. Angry Banker is probably among the so-called "special interest populists" such as former SEC Chairman Christopher Cox, whose mission it was to destroy the minimal regulatory powers of the commission he headed. Henry Paulson, at Treasury, was another special interest populist, crippling the competitors of Goldman Sachs where Paulson's core constituency may be found. Present SEC chairperson Mary Schapiro served the interests of the banks which funded her last position as head of FINRA. Ms. Schapiro dumped millions of dollars of auction rate securities off FINRA's books shortly before the ARS market collapsed, leaving investors holding $336 billion in illiquid assets.

Populist politicians are standard issue, and this applies as well to political appointees. They are, all of them, taking care of their own. The rest of us are invisible.

2009 Jun 24 01:34 PM

[THofler]

What Phil fails to realize is that the worst regulatory damage was done by the SEC in April 2004 (before Cox arrived) when they blew away the leverage limits on the i-banks & replaced the limits with super-regulators with authority to inspect i-bank books.

This change was demanded by the Basel II folks. The logic at Basel II is that leverage should scale with risk & that risk can & should be measured with modern statistical computer models. Of course some of these models are the same ones that gave us AAA rated CDO's.

The integrity of our system was already shot on Cox's first day of work at the SEC. Yes, Cox was rotten too, but worry more about the Basel folks in Europe who still think that their system is just fine except for the need to tweak those computer models a little bit. Geithner seems to be in love with Basel II and the FSB too.

2009 Jun 25 01:21 AM