When Congress returns next week from its Memorial Day break, it will attempt to merge the new 1,616-page Senate financial regulatory bill with its House counterpart and send it to President Obama for signature.
If you thought the Troubled Asset Relief Program (TARP) was bad enough, here comes TARP 2. It would make future government bailouts of firms more likely. Regulators would decide which companies to wind down and which to rescue, leading to political favoritism, no matter who runs Washington.
It’s unlikely that any senator has read the entire bill, which would hurt Americans by raising the costs of banking—an extra $70 billion over the next decade in financial fees—and forbidding certain transactions.
Just reading the Orwellian list of offices created by the bill is enough to make anyone’s head spin. A Financial Stability Oversight Council would watch out for risks to the economy and recommend capital requirements to the Federal Reserve. The Council would be supported by an Office of Financial Research financed by a Financial Research Fund.
With a two-thirds vote of the Financial Stability Oversight Council any firm—either financial or nonfinancial—could come under its control. The FDIC and Treasury could treat the firm’s shareholders and creditors as they chose, without regard to existing laws.
In addition, an Orderly Liquidation Authority Panel would decide which firms are troubled, and which are too big to fail. Some firms would be allowed to fail, others wouldn’t. Then, the panel would authorize the Treasury Secretary to ask the FDIC to restructure troubled firms that are too big to fail.
The FDIC would be able to seize and restructure failing financial institutions and create new financial companies to which to transfer existing firms’ assets. This would pave the way for more bailouts. If firms know that they will be restructured and prevented from bankrupcty, they would be more likely to take risks.
That’s not all. An Office of National Insurance would decide whether there are gaps in insurance coverage that could lead to crises, either in insurance or in the entire financial system, even as AIG’s prospective collapse in 2008 was once deemed globally destabilizing.
Senators plan four new offices each for the SEC and the Fed. An Office of Municipal Securities would protect investors who buy tax-exempt state and municipal bonds, a new regulatory sector for the SEC.
A Consumer Financial Protection Bureau at the Fed would regulate consumer financial products, especially credit and debit card disclosure, and services, including forbidding unfair, deceptive, or abusive practices—which are already illegal.
In all, the pending legislation puts a lot of faith in the very regulators who missed the genesis of the 2007-08 financial crisis.
Absent from new regulation are Fannie Mae and Freddie Mac, two government-sponsored mortgage-finance enterprises. No matter that Fannie and Freddie have already received $145 billion in taxpayer dollars, and are forecast by the Congressional Budget Office to need another $370 billion more over the next 10 years.
Rather than neglecting the GSEs, Congress should limit or reduce Fannie and Freddie’s portfolios of mortgages and mortgage-backed securities.
In addition, Congress could require banks to hold more money when they make loans, and could create an expedited bankruptcy process to allow large financial firms to be broken up by the courts, with assets sold to the highest bidder.
The Senate has passed a 1,616-page bill with $70 billion in extra taxes and a dozen new bureaucracies—and expects this behemoth to have a beneficial effect on the economy. But most Americans know better.
Examiner columnist Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.
