AEI scholar Peter Wallison predicted the failure of Fannie Mae and Freddie Mac many years before they collapsed, recognizing that their status as government-sponsored enterprises invited risky behavior, prolonged through their political clout. Such demonstrated foresight is a good argument for paying attention to Peter when it comes to financial regulation. That, and his ability to explain the mind-numbing issues clearly.
So one reads his Wall Street Journal op-ed on the financial regulatory bills in Congress with a gulp. From “The Permanent TARP“:
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.
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.
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