Wednesday, April 07, 2010

Today's Neosocialists, and their methods

Marx Would Be Impressed
[...] Today's neosocialists are smarter than their ancestors. Instead of outright takeovers, they are achieving much the same goal through rigid regulations. ObamaCare is a prime example. Health insurers will eventually be private in name only, as the details of their policies will be dictated by governmental decrees. About the only thing companies will have any autonomy over--perhaps--will be their corporate logo.

Entitlements go hand in hand with sweeping, overbearing regulations. President Obama wants higher education in this country to be free of charge, which is why his Administration is pushing for a government takeover of student lending. With such powers it will be but a wee stretch to intrude even further into the governance of the nation's colleges and universities--including, ultimately, admissions.

Senator Chris Dodd's (D--Conn.) recently unveiled package of financial regulatory reforms is a neosocialist's dream. It is also destructively stupid. The bill doesn't address the key causes of the recent economic crisis: the Fed's too loose monetary policy, the behavior of Fannie Mae and Freddie Mac in buying or guaranteeing almost $1.5 trillion in junk mortgages and the failure to properly regulate credit default swaps and other derivatives.

Dodd's punting on swaps is astonishing. Years ago Washington should have mandated that such instruments go through clearinghouses so there'd be full transparency and proper margin requirements. After all, classic derivatives such as soybeans and currency futures have had margin requirements and clearing mechanisms.

In the name of fighting Washington's too-big-to-fail doctrine for major financial institutions, Dodd's bill is a de facto institutionalization of them. Financial outfits that are deemed a threat to financial stability will actually be protected by the government. The bill establishes a $50 billion fund to deal with big failures, but the fact that such a fund exists tells the market that when trouble comes big banks will be saved. Thus these biggies, like Fannie and Freddie, will have lower costs of borrowing--debt is by far the biggest component of their capital--which will put their smaller competition at a crippling disadvantage. [...]

In a recent post I addressed how Fannie and Freddie are being protected while their competitors, who have already paid back money, are being unfairly penalized.

And where is this all leading us? The Big get Bigger, the small disappear:
Moreover, the bill doesn't address the problem small businesses have with the current credit system. Bank examiners are applying a mark-to-market mentality in evaluating bank loans. This is an unfair bias toward bigger-sized borrowers and, of course, the debt-hungry U.S. government. Thus the paradox of today: bargain-basement rates of interest for larger firms and higher costs--or no credit at all--for smaller borrowers.

With favored access to low-cost debt the big will get bigger--and they will be beholden to Washington.

Dodd's scheme would create a new regulatory bureaucracy, the Financial Stability Oversight Council (FSOC), with sweeping powers for itself (and the Fed). Chief among its tasks would be assessing risk of banks and their products and activities, yet Washington has demonstrated that it is incapable of judging risk. Washington would have vast sway over the operations of the U.S. financial system. In this new world banks would have to get permission from Washington for any innovation. If an institution incurred Washington's displeasure, bureaucrats could order divestitures of businesses or could even put a firm out of business. [...]

Read the whole thing for more details. Government is creating the problems, not solving them.

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