Why we shouldn’t allow the federal government to accumulate any more power over the financial industry (and why in fact it already has too much):

… the case for broadening regulators’ oversight to include investment banks and other financial institutions is based on three flawed assumptions.

The first is that the same factors that justify expansive powers to close banks and take control of their assets are equally applicable to investment banks and other financial institutions. But the FDIC’s interest in commercial banks is unique — because it guarantees deposits up to $250,000, the FDIC is a bank’s most important creditor and has a stake in its health as the representative of American taxpayers. The government’s stake and the need to assure that depositors do not lose access to their deposits, even temporarily, arguably justify the FDIC’s extraordinary powers. Those factors are not present with investment banks or other financial institutions.

The second flawed assumption is that our bankruptcy laws are not adequate for handling defaults by investment banks or other financial institutions. …

Contrary to the widespread myth that bankruptcy is time-consuming and ineffectual, Lehman sold its major brokerage assets to Barclays less than a week after filing for bankruptcy. It is now in the process of selling its tens of billions of dollars of less time-sensitive assets at a more deliberate pace. …

The third flawed assumption is that financial firms flirting with distress are somehow worse decision makers than federal regulators. But the opposite is likely true. If the Treasury, FDIC and Fed had authority over investment bank failures, troubled banks would have a strong incentive to negotiate for rescue loans, and their pleas would be heard by regulators influenced as much by political as financial factors. The involvement of three different regulators (and mandatory consultation with the president) would magnify this risk. With bankruptcy, in contrast, the decision of whether and when to file is made by an institution’s managers and creditors, who have the best information and their own money on the line.

[Via Professor Bainbridge], who has more thoughts.

Much of the risk taking occurring in these institutions was caused by the moral hazard of knowing (or at least being willing to bet) that the government would step in and bail them out. Particularly since many in the government were on their payroll, either through campaign contributions, sweetheart mortgage deals, or simply the incestuous revolving door between the federal bureaucracy and the institutions. Fannie Mae and Freddie Mac both seem to have been a cushy retirement home for former Democrat operatives (e.g., Franklin Raines).

And in the “gee, ya think?” category — “Dodd’s Troubles Open Debate On Congress’ Ties With Special Interests“:

Dodd has become the poster boy for critics who say the inevitable ties between long-time members of Congress and special interests are undermining efforts to revive the economy.

“He literally thinks he’s going to play a critical role from saving us from ourselves,” Christopher Healy, the Republican Party chairman in Connecticut, said of the Democratic senator.

“It’s like putting the arsonist in charge of the volunteer fire department. He knows where the fire is because he set it. But beyond that, he can’t offer much help.”

Such a debate (assuming it actually occurs) is long overdue. It should have occurred during the election campaign.

We have to break up this megatrust.

I wish that I could make Human Action and The Road To Serfdom mandatory reading on the Hill, but it would probably be beyond the IQ of many, indeed most of them.

[Late afternoon update]

Thoughts on progressive corporatism:

At this point, I think that the relevant political divide is not between the two parties. It is between the forces of Progressive Corporatism and the (much smaller) forces of The Resistance.

Or, as Virginia Postrel has noted, between dynamism and stasis. That’s the real point. Despite all the rhetoric, these people don’t want change. They are defenders of the status quo. Everything they’re doing is to prevent change. They don’t want housing values to change, they don’t want bank stock values to change, they don’t want UAW workers’ salaries to change, and (most of all) they don’t want any change in their level of power over the rest of us.

Instapundit:

Remember, when a private company wants to cover up billions in losses and the responsibility for them, that’s a major scandal and proof of the evils of capitalism. But when a government regulator does the same thing, that’s just how people are, these things happen, whaddyagonnado? Plus, more evidence that the country’s in the very best of hands:

After the companies were taken over, investors around the world who buy the companies’ debt and mortgage investments weren’t willing to pay top dollar, reflecting doubts about whether the U.S. government would stand behind the firms if they faltered further. As a result, mortgage rates initially rose, further depressing house prices, contrary to what the government intended when it took over the firms.

Then, earlier this month Freddie Mac lost its chief executive, longtime banker David Moffett, who joined the company at the government’s behest in September. He clashed with government regulators who pushed him to take steps that would forgo revenue opportunities. Freddie Mac is now looking for a new chief executive, chief operating officer and chief financial officer — and having trouble finding them.

Gee, why would a business that the government has taken over and mismanaged have trouble recruiting fall guyssenior executives in this political climate?

I think that Liddy missed a big opportunity to have a McCarthy-hearing style moment, after having to take all that Bravo Sierra from the anal orifices on the Hill who really caused the crisis because they were on the take, after taking a thankless job for one dollar a year. He could have castigated them for their own roles, and resigned, with an “At last, Senator, have you no decency?” He’d have been my hero if he had, and I suspect a lot of people would have agreed.

Thoughts on the unsavory and oppressive relationship between big government and big business:

…one needs to remember that the New Deal was not the assault on big business that its fans claim. FDR may have talked a good game about going after “economic royalists,” and he did love confiscatory personal income taxes. But he and his Brain Trust also loved cartels, big businesses, and other “big units” of society. The notion that big business and big government are at war with one another is one of the great enduring myths of the 20th century. The truth is that ever since Teddy Roosevelt abandoned his love of trust-busting, progressives have liked big businesses big, really big. The bigger the business, the more reliable the partner for big government.

Contra popular myth/lies, It’s not libertarians who favor big business and corporations.

[Update late morning]

Not Japan — Argentina:

In visits to Asian capitals during the region’s financial crisis in the late 1990s, I often heard Asian reformers such as Singapore’s Lee Kuan Yew or Japan’s Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change. How fortunate, I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae — among the largest campaign contributors to Congress — made me wonder if the differences between the United States and the Asian economies were only a matter of degree.

On Wall Street there is an old joke that the longest river in the emerging-market economies is “de Nile.” Yet how often do U.S. leaders respond to growing signs of economic dysfunctionality by spouting nationalistic rhetoric that echoes the speeches of Latin American demagogues like Peru’s Alan Garcia in the 1980s and Argentina’s Carlos Menem in the 1990s? (Even Garcia, currently in his second go-around as Peru’s president, seems to have grown up somewhat.) But instead of facing our problems we extol the resilience of the U.S. economy, praise the most productive workers in the world, and go on and on about America’s inherent ability to extricate itself from any crisis. And we ignore our proclivity as a nation to spend, year in year out, more than we produce, to put off dealing with long-term problems, and to engage in grandiose long-term programs that as a nation we can ill afford.

Read the whole depressing thing.

If the problem was too little regulation, then why are the unregulated institutions being used to bail out the regulated ones?

I wish that someone had asked the president that question last night. And here’s another missed opportunity — if the solution to our problem is nationalizing health care, why is Europe, where they did that years ago, having the same problems we are?

[Update a couple minutes later]

Here are some more questions that should have been asked last night:

Mr. President, a staple of Democratic party rhetoric over the years is that the GOP is the party of big business and the Democratic party is the party of the working man. Yet it would appear to the casual observer that Wall Street banks have hijacked your administration and are moving heaven and earth to socialize their staggering losses. Do you find it worrisome that Republicans are now increasingly inclined to argue that what’s good for Citigroup is not necessarily good for America, reversing the long-established rhetorical order of the political universe? And how comfortable are you with your progressive allies who are now wondering aloud about an administration that argues that bankruptcy is only an option for “the little people”?

We may not have the best government that money can buy, but we definitely have one that money can buy.

[Update a few minutes later]

Here’s an excerpt from the Barone piece that I’ve been thinking about for a while:

Democrats like Barack Obama and Barney Frank, at least on the campaign trail or in sound bites, have portrayed the financial crisis as the product of deregulation. The solution, they say, is more regulation. In that vein Frank, one of the brainiest members of Congress, is proposing that the Federal Reserve become a regulator of systemic risk, with the power to regulate firms that because of their size or strategic position are of systemic importance.

My American Enterprise colleague Peter Wallison has argued powerfully that this is a bad idea. Neither the Federal Reserve or other regulators identified the systemic risk which caused this crisis. Neither did most financial institutions or investors. Systemic risk is hard to identify for the very reason that it is systemic: It results from just about everyone doing what turns out to be the wrong thing. (Housing prices will always go up, therefore there is no risk in buying mortgage-backed securities, etc.) Identifying some firms as posing systemic risk is saying that they are too big to fail, in which case they’ll take undue risks and end up having to be bailed out by the government. These strike me as very strong arguments.

I would have a lot more confidence going forward if the people running things now weren’t the same people who didn’t see this coming (and in the case of Barney Frank and Chris Dodd, and Charles Schumer, partially responsible for it). Why not put Peter Schiff in charge? He’s one of the few who actually called it far ahead of time. Of course, the last thing that this administration wants is someone who actually understands economics.

…and staying bought. Some thoughts from Glenn Reynolds:

it wasn’t just AIG: Wall Street in general gave profligately to Barack Obama, and to Democrats generally, in 2008. Yet now, when the polls shift, all of those politicians who were so happy to take the cash are suddenly pretending they have never even heard of Wall Street. Instead they’re getting behind punitive taxes, protesters steered to executives’ homes and what both the Financial Times and the New York Daily News have called a “witch hunt” against bankers and brokers.

As Joseph Nocera wrote in the New York Times, “Congress, with its howls of rage, its chaotic, episodic reaction to the crisis, and its shameless playing to the crowds, is out of control. This week, the body politic ran off the rails.” They probably acted nicer when they were asking for money just a few months ago.

If these donations had been given out of love and admiration, Wall Street donors would have reason to feel jilted. But if–as is generally the case with political donations–they were more in the order of protection money, then Wall Street donors may instead feel duped. They might want to ask themselves what protection, exactly, they got for their investment.

And more from Jonah Goldberg:

The Democrats were whorish in their quest for AIG money. But once the money stops flowing and the neighbors are watching, the Democrats suddenly pretend they never wore the naughty librarian outfit for their Wall Street Johns.

As Glenn says, it might be refreshing to see businessmen support politicians who support free markets. Some do, but too many don’t. Because we’ve let the government get out of control, they get far too much financial leverage from their political contributions. As Glenn notes, when an investment in a politician has a much higher payoff than an investment in (say) plant, the country has gone far off the rails from what the Founders intended.