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.