Economy & Budget

Financial Regulation: The Next Governnment Takeover

Democrats are pressing ahead with legislation to create a vast new bureaucracy that would have virtually unlimited powers to slap sweeping controls and costs on the U.S. financial industry that critics say will stymie economic innovation and growth.

Nearly a year and a half after the nation’s banking system plunged the economy into the worst economic decline in decades, Senate Banking Committee Chairman Chris Dodd is still struggling to finish work on a bill that would exert unprecedented government controls over virtually every segment of the nation’s financial system.

The administration-backed legislation, an even tougher version of which passed the House in December, would create a new consumer protection agency with regulatory powers to take over shaky financial institutions and establish an emergency government fund to bail out troubled banks.

The emerging financial regulation plan is part and parcel of a growing web of other legislative proposals by President Obama that, when added  to health care reform and energy regulation, would result in the largest regulatory takeover of the private sector in U.S. history.

“There’s virtually no limit on the power this consumer protection agency would have,” said David John, a Heritage Foundation senior analyst who has been closely tracking the legislation’s development in both houses of Congress.

“They’re also  talking about putting in a special mechanism where the regulators could seize financial institutions and then split them up, sell them or capitalize them,” i.e., bail them out, John said in an interview with HUMAN EVENTS.

Under such authority, “this essentially would create a permanent TARP,” similar to the $700 billion Troubled Asset Recovery Program Congress passed in 2008 to bail out the nation’s largest banks, he said.

Dodd, who decided to leave the Senate at the end of this year rather than face nearly certain defeat at the polls in November, is in a hurry to pass a bill before he retires from public service. But committee observers say he has been struggling to fashion a bill that can win majority support. Committee Republicans, led by Sen. Richard C. Shelby of Alabama, were almost unanimous in their oppostion, with the exception of Tennessee Sen. Bob Corker who has sought to work out a compromise with Dodd, but thus far to no avail.

A number of Democrats on the panel are also said to have had some concerns about the bill Dodd has been putting together, including Sens. Evan Bayh of Indiana, Mark Warner of Virginia and Tim Johnson of South Dakota. “The bill is a moving target,” John said.

“The process over this financial regulation bill is reckless and lurching.  A political process that has lost sight of the right solution,” said Cesar Conda, former chief domestic policy adviser to Vice President Richard Cheney and a longtime economic adviser to Republican party leaders.

“Corker and Dodd are searching for a ‘deal’ for the sake of a deal as time runs out. This is a serious issue that has become a bad Senate joke. It looks just like health care,” Conda told HUMAN EVENTS.

“Shelby and Tim Johnson want to get it right. Dodd just wants to get it done. This bill is dangerous for the country. It would create a huge new ‘consumer’ bureaucracy at great cost and establish a resolution slush fund to bail out failing big banks and other financial institutions,” he said.

“The Dodd plan punishes institutions with high capital reserves by using a resolution funding authority which makes them pay into the fund by size,” which becomes a disincentive for them to be well capitalized. “Insurers hate this,” he said.

The Republican solution should be let them fail. It’s called bankruptcy,” Conda said.

A major disagreement within Dodd’s committee was not only where the consumer protection agency would be located but also the rule-making authority it would have the nation’s financial institutions.

Dodd, who after months of negotiations has zigged and zagged over the shape of key parts in the legislation, had proposed making the agency a division of the Treasury Department, instead of a separate, independent agency as Obama has recommended.

But Reuters reported last week that Shelby and Corker objected to the rule-making power Dodd wanted to give the agency not to its placement at Treasury.

Efforts by Dodd to take some of the consumer protection regulatory powers away from the Federal Reserve ran into sharp oppositon from Fed Chairman Ben Bernanke, and by last week there appeared to be deep division about where to put it.

“We are watching very closely what the agency’s structure is and don’t care where it is located. We just don’t want an independent agency with the rule-making powers Dodd has proposed,” John said.

The House-passed Wall Street Reform and Consumer Protection Act goes much further than the Senate committee’s proposals. It creates an independent Consumer Financial Protection Agency, as well as an inter-agency oversight council to identify and regulate major troubled firms that are facing collapse.

It authorizes the Federal Reserve to provide up to $4 trillion in funding to stablize financial institutions whose failure would endanger the entire financial system; creates a process to dismantle big financial institutions;  gives shareholders a “say on pay” on executive compensation; empowers the Securities and Exchange Commission with new regulatory authority to protect investors and securities markets; and requires hedge funds and their advisors to registers with the SEC.

But questions remain whether Congress, facing a long drawn-out battle over health care and the Senate reconciliation battle to come, plus fights over energy and climate change legislation, and upcoming jobs bills, will be able to  accomodate the financial reform bill before the midterm election in November.

For now, Republicans are walking a fine line where on one side they say they want new financial regulations that will prevent future financial breakdowns. But they have criticized earlier drafts of Dodd’s plan that they say would impede access to credit and give government too much control over the nation’s financial system. Too much of the plan smacks of another federal bailout, they say.

Even Democrats on the committee acknowledge that Dodd’s plan has still not resolved a number of sticky issues that have prevented any bill from being reported out of the committee.

“We’ve come to the point where there’s some issues we haven’t got a satisfactory, mutual answer,” Sen. Jack Reed, Rhode Island Democrat, told the Wall Street Journal. “At that point, you could talk forever. You have to say, ‘Let’s go down to the Senate floor and let’s debate it.’”

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