Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke believe the federal government needs far more regulatory power. Geithner has proposed a new agency with the power to seize and control non-bank financial institutions. This, he says, would have made the AIG bailout cheaper. So would have not having a bailout at all, but surely he would not take that option seriously.
Geithner is capitalizing on the public outrage over the AIG bonuses. The Washington Post quotes Geithner as saying, "The issue of excessive compensation extends beyond AIG and requires reform of the system of incentives and compensation in the financial sector." The Post reports:
"In making his case for regulatory reform, Geithner told the committee, ‘AIG highlights broad failures of our financial system. Our regulatory system was not equipped to prevent the buildup of dangerous levels of risk.’ He said the federal government lacks the legal means at present ‘to manage the orderly restructuring of a large, complex non-bank financial institution that poses a threat to the stability of our financial system.’"
Bernanke echoes this concern. "AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms," the Chairman says. "If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate."
We know that for generations, the federal government has been regulating finance to the hilt, setting interest rates, monopolizing money and claiming it was managing the business cycle so another depression would never come. Most people in charge thought nothing was amiss with the unstable financial bubble over the last several years. The central planners did not foresee this recession, and yet now say had they had more power, they would have steered the economy away from the problems now visible. Geithner, who was intimately involved with the bailouts late last year, even claims that had he and the other finance bureaucrats and regulators had more powers, they could have prevented the high bonuses.
Anthony Gregory [send him mail] is a research analyst at the Independent Institute and editor-in-chief of the Campaign for Liberty. He lives in Berkeley, California. See his webpage for more articles and personal information.