Obama’s Trickle Up Economics aka Too Big To Fail

Posted by Jason | Posted in Government | Posted on 17-11-2009


The latest mile marker on our road to fascism is the regulation being crafted by the administration and Barney Frank and the alternative being crafted by Chris Dodd. The two people most responsible out of politicians for the mess we are in are now the ones claiming they are going to fix it.

Both bills are intended to cover more than just companies that are engaged in financial activities. Following the administration’s lead, both provide that a company engaged in a financial activity “in whole or in part, directly or indirectly” could be subject to enhanced regulation and supervision.

The Frank bill seems intended to regulate all financial firms as though they are banks. Thus it requires financial activities to be transferred out of operating companies into a separate entity, which would then be regulated like a bank (even in its relations with its parent company).

The Dodd bill is a blunter instrument, proposing to regulate all companies that include financial activities “in whole or in part.” But almost all companies—retailers, manufacturers and service organizations—engage in some financial activities, if only to promote the sale of their products and services. If the administration’s health-care proposal has the potential to nationalize one-sixth of the economy, Messrs. Frank and Dodd are bidding to cover the rest.

“in whole or in part, directly or indirectly” and “in whole or in part” sure sound all encompassing. It would seem to me that every business is “engaged in financial activity” to a point. Add the control of government health care to this equation, and you pretty much have complete control of business.

The administration’s original legislation would give the Federal Reserve authority to regulate and supervise all large nonbank financial institutions and, if they are in danger of failing, take control of them and resolve their problems outside the bankruptcy system. The underlying notion is that the failure of one of these companies—which include bank holding companies, securities firms, insurance companies, finance companies, hedge funds and possibly others—could cause a systemic collapse.

Although the administration likes to give the impression that its proposal is limited to exceptional cases and the largest financial institutions, its draft legislation, and the Frank and Dodd bills, use very broad language to describe the triggering event for either enhanced supervision or a subsequent bailout.

Putting it bluntly, the administration’s proposal, and the House and Senate draft bills, would establish too big to fail as national policy. Whether the companies are regulated by the Fed or by a new agency, they will still have been marked as threats to economic well-being—and thus seen by creditors and investors as specially protected by the government. This will give them the same advantages enjoyed in the mortgage business by Fannie Mae and Freddie Mac, with the same result for competitors and taxpayers.

This sure sounds like welfare for the rich to me. Basically if you are lucky enough to have your business labeled “too big to fail” (I’m sure we’ll see more lobbyist pushing to have their business classified as such), then you basically do not have to worry about your actions. Take your profits while you can and things are good, and when things get bad, don’t worry about it. The American taxpayer will have to eat it. The investors and the executives reap the rewards and have all upside.

The Frank bill would explicitly authorize the Federal Deposit Insurance Corp. (FDIC) to provide financing that would restore a failed company to health. The craftier Dodd bill implies that creditors will take a hit, but then authorizes the FDIC to pay off creditors in full if that would avoid “serious adverse effects to financial stability or the United States economy.”

Moreover, under the Dodd bill, after the government has settled with its creditors, a failed company can have a public offering of its shares and return to the competitive fray. That’s good news in one sense, of course, but not for everyone; under the Dodd plan, the government is authorized to recover what it spent by taxing all financial firms—that is, firms such as bank holding companies and others involved “in whole or in part” in financial activities—with total assets of more than $10 billion.

In effect, the legislation creates moral hazard by transferring the risks and losses of a failing company from its creditors to its competitors. The protection of taxpayers may be a mirage anyway, since the FDIC is authorized to put off these collections indefinitely to avoid an “adverse effect on the financial system or economic conditions.”

via Peter J. Wallison: The Permanent TARP – WSJ.com.

This regulation amounts to “there are no losers here” policies. It’s like all the kids participating in a sporting event getting a trophy, because they are all winners. Meanwhile, they lose their sense of competition and drive. There is no downside for a company once it’s classified as too big to fail. This is a scary proposition. If they have bad management, they don’t have to worry. The government will step in, usher them back to “health” with tax payer money, and then more bad management can come in and make profits until it falls apart again. Talk about wealth distribution. I didn’t know Obama meant this when he was talking to Joe the Plumber. I should have known when he said he was for “Trickle Up Economics” instead of Reagan’s “Trickle Down Economics”. Apparently with trickle up economics, the wealth that the poor and middle class have moves up to the rich that have political connections.

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