I must say, from the get-go, that I don't believe what happened during the financial tsunami of last September was okay. However, Tim Geithner's attempts, announced this past week, on behalf of the Obama administration, seeks to expand the federal government footprint over the financial services sector--steps that would be unprecedented, which would unfairly extend to private companies that managed themselves prudently over the crisis, which would likely deter the development and introduction of innovative financial services products, and which could unconscionably intrude into the internal affairs of private businesses, including their rights to make operational decisions, e.g., hiring executive talent.
The real question is what happened last September? Liberals argue that it was lack of regulation, the excesses of capitalism run amuck. But what liberals fail to acknowledge is that the government has not been blameless but part of the problem, it has not been proactive and timely, and it wants to be rewarded by expanding its reach in new and unprecedented ways, potentially allowing for political influence and corruption, the very sorts of things Thomas Jefferson worried about and warned us against.
Diebold and Skeel, in a 3/27 Wall Street Journal op-ed entitled "Geithner is Overreaching on Regulatory Power", reminds us of some government missteps during the crisis, including the fact that the FDIC brokered an initial uncompetitive offer to sell Wachovia to Citibank, only to find its arranged offer trumped by Wells Fargo: Did the federal intervention respond in the best interests of the American taxpayer and reflect a superior understanding of the valuation of Wachovia over the private sector? In addition, the FDIC waited until IndyMac had dug itself into a $10B hole before pulling the plug. They also pointed out the way vacillating regulators swerved Lehman Brothers by implying a Bear Stearns-like bailout was in the offing but not delivering, resulting in an ill-prepared bankruptcy.
We also haven't really been calling the federal government to task for not recognizing and reacting to clear signs of a housing bubble, for allowing GSE's like Fannie Mae and Freddie Mac to grow too big, for political pressure on lenders to write mortgage loans to higher-risk homebuyers (i.e., without a conventional down payment or proof of creditworthiness). Why did the regulators allow derivatives to be used for reserve requirements and why didn't they anticipate the vulnerability of required but tradeable swaps to bear raids? Why didn't regulators stress-test mark-to-market accounting changes and the effects of having to liquidate positions in a frozen market? Why didn't regulators question or enforce reserves or collateral for CDS writers and/or otherwise hedge for commensurate risk?
We reward this kind of unacceptable performance with various federal regulatory bodies fighting for their own share of an expanded regulatory pie? What could possibly lead Obama and his cronies to believe that the answer to an incompetently administered status quo of regulators is to expand their reach into business? This is the same line of reasoning we see time and again from liberals: so what if we aren't reaching all the truly poor households with SCHIPS before we start opening eligibility to the upper middle-class, many of which already pay for their kids' health insurance? Liberals always feel the answer to a leaky bucket is not to fix the bucket, but to buy a bigger leaky bucket.
As usual, I expect conservatives to be the voice of reason. There is need for reform, but these reforms should not come at the expense of a viable, globally-competitive financial services industry and American leadership in innovative products and services. We need to know why the market, the accountants attesting to financial statements of financial services companies, bond-rating agencies, and government regulators failed to anticipate the same kinds of problems that hedge funds were able to exploit. We need to ensure there is proper, timely disclosure of material market-influencing transactions, e.g., by hedge funds. We need to make sure risk is properly valuated with commensurate risk premiums and collateralization (e.g., heightened margin requirements for low-priced stocks). We need to insist on structural independence of risk assessment just as we insist on independence of auditors. We need to balance accounting valuation issues to smooth the impact of asset writedowns on otherwise profitable concerns during frozen markets.
However, I personally believe that the best guard against systemic risk is not by setting up an expansion of ineffective, behind-the-curve federal regulators and increasing their span of control in the markets; if anything, it creates a barrier to entry and lessens competition (e.g., to AIG) which I feel is necessary to lessen systemic risk. There are companies which simply failed to anticipate and hedge against the risk of deleveraging in a highly leveraged market, and the companies, their managers, and their shareholders should accept responsibility for unduly exposing the company to catastrophic risk, not the American taxpayer. What we have right now is a government which picks winners (e.g., Bear-Stearns) and losers (Lehman Brothers) and has done little to prevent moral hazard; it has gone through 2 or 3 shifts in strategy in allocating TARP funds, which has not inspired confidence in government leadership.
The best thing that the federal government can do is to be consistent and unbiased, let the vested, knowledgeable players in the economic arena act without the threat of incompetent government actions introducing fear, uncertainty and doubt, reduce threats of counterproductive tax hikes on businesses, investments, and job-creating executives and small business owners, improve the nature and extent of salient market information for participants, and execute its existing regulatory mandate more effectively and efficiently.
Taxpayers should not be an enabler of statist liberal addiction to Big Government. We need to show tough love and just say 'no' to this unconscionable bureaucratic power grab by Obama and Geithner.
