Congress Creating Big Brother for Wall Street

Senator Chris Dodd’s (D-CT) approach to overhaul financial industry regulations is scheduled to be debated next week in the Senate Banking Committee with a mark-up of the bill starting in early December. This bill is sold as an effort by the federal government to seize control of financial institutions with the potential to cause a financial market meltdown. Sources in the Senate tell me that the true effect of this bill will be to lock in the Troubled Assets Relief Program (TARP), give special treatment for the trading partners of financial institutions facing bankruptcy, and grant more power to the Federal Reserve Board in Washington over monetary policy. This financial regulatory reform effort will create a massive new bureaucracy that will oversee financial institutions that will effectively serve as a Big Brother for Big Business.

From a Senate Banking Committee press release

“It is the job of this Congress to restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them,” Dodd said at the press conference. “We must create a sound foundation to grow the economy and create jobs.”

The problem is that the big government approach to the financial regulatory reform effort may harm economic growth and grants sweeping new political powers to the Federal Reserve over monetary policy. The big ticket item for the legislation is the creation of a new federal bureacracy called the “Consumer Financial Protection Agency.” The discussion draft of the legislation describes the new agency as “an independent watchdog to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.” The fact of the matter is that this new government entity distracts freedom loving Americans from many other disturbing aspects of this bill that will grow government and harm economic prosperity.

The discussion draft “prevents excessively large or complex financial institutions from bringing down the economy” by “creating a safe way to shut them down.” They create a “Agency for Financial Stability” to be government entity to replace the free market forces. If these banks fail, they will avoid a bankruptcy proceeding, like any other business, and their creditors and trading partners will be bailed out by the federal government. If you liked the Bailout of Wall Street, then you will love this legislation because it makes permanent a mechanism to place these private entities into a federal receivership (government control) then bail out the people doing business with them under the promise of the cost “ultimately be charged to financial firms.” A senior Senate staffer on financial service issues tells Big Government that this provision “treats financial companies different from everybody else – everybody else has to go to bankruptcy.”

Another objectionable provision would give control of the Regional Federal Reserve Banks to the Chairman of the Federal Reserve. Sources in the Senate tell Big Government that this provision grants Chairman of the Federal Reserve Ben Bernanke “more political influence over monetary policy.” Sources say that “if you are not going to abolish the Fed, the changes that they make to the regional Fed Board undermine the part of the fed that works the best.” Currently regional board members of the Fed do not answer to the Chairman of the Fed. Usually the “dissenters to easy money are regional Presidents,” because they are independent. The reform in this bill would give control of the regional Feds to so called reforms that “will concentrate power in Bernanke.” The bill might take away some regulatory power from the Fed, “but (the bill) gives the Washington Fed more power over monetary policy. The grave danger is that ” Bernanke lackeys” will be running monetary policy. John Taylor, Professor of Economics at Stanford University, argues that the “loss of Federal Reserve independence is a serious problem, especially at this time of rapidly increasing Federal debt and a greatly expanded Federal Reserve balance sheet.”

There are many objections to the Dodd approach to financial regulatory reform for those that believe in the free market and love freedom, but these provisions mentioned rise to the level of the most objectionable. Financial regulatory reform will create a massive new bureacracy, grow government and make politicians feel better, yet the true effect may be to make our financial sector more insulated from free market forces and give unelected bureacrats the power to run banks and financial services companies. Dodd’s Big Brother for Wall Street approach to financial services reform may do more harm than good for capitalism and economic growth.