Wednesday, June 17, 2009

It Worked So Well in 1933…

The federal government — both the executive and legislative branches — has been “fixing” the American economy for decades, since at least 1933.

After seventy-six years of meddling, you’d think they’d have learned by now that government interference in the economy inevitably makes things worse. But no; the Obama administration is poised to expand federal power over the financial sector even further.

According to the Associated Press:

New Obama Initiative Seeks Fix to Finance Regs

WASHINGTON — A new consumer protection agency highlights a financial system overhaul President Barack Obama plans to unveil Wednesday in effort to avert future economic crises like the one still wreaking havoc at home and around the globe.

We’ve seen the same process repeated over and over again: every layer of bureaucratic regulations designed to avert a particular crisis paves the way for an even greater crisis of a different type. It’s the Law of Unintended Consequences at work, and any normal person would learn from experience. But technocrats are unable to resist the temptation to apply their expertise and manage the country’s economic affairs even more thoroughly.

In this case, the improved regimen involves giving more power to — wait for it — the Federal Reserve:
- - - - - - - - -
Obama’s sweeping change of business regulation also embraces new powers for the Federal Reserve and new rules that would reach into currently unregulated regions of the financial markets. An 85-page draft details an effort to change a regime that Obama’s economic team maintained had become too porous for the innovations and intricacies of the today’s financial markets.

With Congress already embroiled in health care legislation, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year’s end. The consumer agency would ride herd on credit and lending practices that largely went undetected as the economy was sliding into a deep recession.

Given that H.R. 1207, the “Audit the Fed Bill”, has 222 co-sponsors and is ready to move onto the House floor, Mr. Obama’s latest move is a slap in the face for Congress.

Obama said Tuesday he will put forward “a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again.”

“Strong regulatory measures” never prevent crises from occurring. In fact, by inhibiting the normal feedback that would help keep the financial system on an even keel, they tend to exacerbate the crisis when it finally breaks through all the regulatory netting.

Recessions become depressions. Mild crises become major crises. A necessary correction becomes a catastrophic collapse.

Indications are that the government intends to micromanage the financial sector:

Christina Romer, who heads the Council of Economic Advisers, called it an “appropriate balance” and said the administration was “not bulldozing the whole system.” But House Republican Leader John Boehner said that it would have “the federal government deciding what interest ought to be charged on credit cards” and what financial products are available.

“I think it’s just going to be too big of a foot on an industry that already is having financial problems,” Boehner said in an appearance on ABC’s “Good Morning America” Wednesday.

But resistance is building:

The financial sector and lawmakers from both parties concede the need for significant changes in the rules that govern the intricate and interconnected world of banking and investment. But the details of Obama’s proposal already are facing resistance, signaling a tough sell for a president who is spending major political capital on his health care overhaul.

The “too big to fail” principle — which has already been applied to Fannie Mae, Freddie Mac, the major banks, the automakers, and AIG — will be extended to other types of companies:

Under Obama’s plan, the Fed would gain power to supervise holding companies and large financial institutions considered so big that their failure could undermine the nation’s financial system. But even as it gains new powers, the Fed also would lose some banking authority to a new Consumer Financial Protection Agency.


In conjunction with the Fed’s authority over large financial institutions and the new consumer agency, Obama also will propose:

  • Additional protections for investors, including greater disclosure by hedge funds; regulation of credit default swaps and over-the-counter derivatives that previously operated outside of government oversight; and new conditions on brokers and originators of asset-backed securities.
  • A system for the orderly disposition of any troubled, interconnected firm whose failure poses a risk to the entire financial system, together with rules that insist that financial institutions hold more capital to avoid over-leveraging.


The new regulator would have the power to demand that customers have the option of simple financial products, to impose fines and to allow states to pass laws that are stricter than the federal standards. Consumer protections are now spread among various state and federal authorities, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission and banking regulators.

So rather than let businesses sort out their practices according to what is more profitable, and permit competition and consumer choice to keep them lean and responsive, the government — which knows what’s best for you — will make all the decisions instead.

That will tend to cause businesses to lose money, which means that more of them — since so many are too big to fail — will have to be propped up, bailed out, and subsumed by the government.

Which is probably the whole point in the first place.

Hat tip: heroyalwhyness.


Henrik Ræder said...

I'm currently reading Rothbard's great work America's Great Depression. It's almost required reading for anyone interested in this subject.

As for the Fed starting to manipulate things in 1933, it's not exactly so. It started already at its opening in 1914, and triggered the depression of 1920-1921. Which, BTW, was over so fast that Herbert Hoover didn't get a chance to 'cure' it with his useless public works programmes. Not that he didn't try, but by the time he had the organisations for them in place, there was no more depression to cure.

Unfortunately, he later became president.

Back to the Fed. It manipulated *extensively* during the 20's, fueling an inflation-based boom, and tried to absolve the British government from its own stupid policies, not least from 1927 onwards, with a big inflationary push. It was basically the collapse of the Fed-created bubble that created the Crash of 1929. For the Depression, though, you'd need someone like Hoover, of course.

Current mistakes by Fed / Federal Government are an order of magnitude greater. Further, the US in the 1920's was a major creditor nation. Now it's a debtor.

The link above goes to a free PDF of the book, directly from the publishers' web site. For a HTML version, or a link to order a paper copy, go here.

Henrik Ræder said...

BTW, the whole regulatory mess proposed above - all of it - could be rendered redundant by one simple measure:

Raise the interest rates.

That, of course, is something the US government is no longer in a position to do. It's addicted to inflation like a hardcore drinker to alcohol. Taking away the stimulant would cause cardiac arrest.

Henrik Ræder said...

BTW, talking of the Federal Reserve, I found this interesting piece about Kennedy revoking its right to issue money:

John F. Kennedy vs. The Federal Reserve

(Wikipedia article here, original here)

This was done on June 4th, 1963. It's still (technically) in force, but not in use. Basically, it creates a US Notes (as opposed to Federal Reserve Notes) backed by silver (as opposed to backed by - nothing), and constitutes a return to honest money.

EscapeVelocity said...

I have some silver certificates.

Henrik R Clausen said...

Certificates are good, physical silver better :)