This is rather frightening, the Obama administration is not only seeking broad power to regulate risk on Wall Street, they’re also seeking the broad power to seize companies that the Treasury Department thinks may represent a risk to our economy if they fail:
Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers.
The administration’s proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed’s other responsibilities, particularly its control over monetary policy.
The government also would assume the authority to seize such firms if they totter toward failure.
Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.
The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.
The government has a legitimate interest in regulating banks partly because of the public/private partnership in controlling monetary policy. And secondarily, as result of the banking collapse during the Great Depression, as a guarantor of deposits within certain limits through the FDIC. Insurance companies and hedge funds are another matter, people don’t deposit their cash in them, they invest in them, and in doing so they accept certain risks.
What the Obama administration wants to do is socialize investment risks by making the government a guarantor of sorts for the investors. Call me crazy but I suspect this type risk socialization will have a detrimental effect on the economy, while government is spending more money on regulatory activity I suspect we’ll see a decline in capital investment… Less risk means less potential reward and I suspect investors will be more cautious than they have in the past.