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08/20/08
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April 21,
2008 Intended to prevent recurrence of the turmoil triggered by the bursting of the housing bubble, the administration proposes to restructure the responsibilities of the agencies who now oversee U.S. financial market operations, in ways that supposedly would promote regulatory information-sharing, cooperation and coordination. In an earlier crisis atmosphere, similar goals justified cobbling together the Brobdingnagian Department of Homeland Security, which just goes to show that, while interagency information-sharing and coordination sound good in theory, they are unlikely to be achieved in actual bureaucratic practice. But the most troubling aspects of the Treasury's blueprint for reforming financial market regulation are found in the far greater powers it assigns to the Federal Reserve. One part of the plan simply affirms actions the Fed already has taken. Apparently concluding that Bear Stearns was too big to be allowed to fail, the Fed, for the first time in its history, granted to such non-bank financial institutions access to loans at its "discount window" — loans previously restricted to commercial banks — and guaranteed $29 billion in illiquid assets to broker Stearns's purchase by JPMorgan Chase. So now that the Fed has lent those billions more to Goldman Sachs, Lehman Brothers, Morgan Stanley, and other Wall Street securities' brokers, the Treasury proposal would permit the central bank to conduct on-site inspections and impose conditions, including capital requirements, on such borrowers — which it now is doing without explicit authority. And most worrisome, the regulatory reform plan also empowers the Fed to ensure "market stability," watching for threats originating anywhere within the financial system, be it from commercial banks, investment banks, mortgage lenders, hedge funds or insurance companies. As economists have asked: if smart, highly paid Wall Street investment bankers with huge financial positions on the line failed to foresee the risk to which subprime mortgages exposed them, how can one expect a regulatory agency to do so? And, what steps will the central bank take to "stabilize" markets, if it does perceive a threat? Will it continue to bail out institutions who run into financial trouble? The prospect of being rescued by taxpayers encourages risk-taking. So, transforming the Fed into a market-stability watchdog may create more market instability — not less. To implement this plan, many new regulations would have to be written and costs would be imposed on financial institutions to comply with them. In collaboration with Burak Dolar of Augustana College, I examined the costs of complying with USA PATRIOT Act's Title III, which required banks and thrifts to be more active in deterring money laundering and disrupting terrorist financing. While the law imposed substantial compliance costs on the entire financial services industry — $11 billion in 2002 alone — large institutions had two distinct advantages: they could spread the costs over greater numbers of customers and transactions, and many already had anti-money laundering procedures in place. In fact, rather than reinvent the wheel, regulators based their rules for PATRIOT Act compliance on the methods already in place — and in the budget — at the large financial institutions. As a result, their smaller competitors were hit with disproportionate compliance costs draining as much as 20 percent of their profits. Thousands of small banks and thrifts closed their doors in the following years, many after being bought out by bigger ones. So, in addition to substantial growth in the federal bureaucracy, one likely "unintended consequence" of the Treasury's regulatory reform plan is greater consolidation of the financial services industry, creating more institutions too big to be allowed to fail and further erosion of the discipline essential to the operation of competitive markets. (Originally published at the Contra Costa Times, Oakland Tribune - republished with permission.)
William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.
Stephen
P. Halbrook, Ph.D., J.D., is Research Fellow at The Independent Institute
in Oakland, Calif., and author of the forthcoming book, The
Founders' Second Amendment: Origins of the Right to Bear Arms, as
well as the books, That
Every Man Be Armed (Independent Institute) and Freedmen, the Fourteenth
Amendment, and the Right to Bear Arms.
Donald A. Downs is Professor of Political Science, Law, and Journalism at the University of Wisconsin, Madison, and Research Fellow at The Independent Institute.
Mike Moore is Research Fellow at The Independent Institute, former editor of The Bulletin of the Atomic Scientists, and author of the book, Twilight War: The Folly of U.S. Space Dominance.
John Semmens is a research fellow at the Independent Institute, a research project manager in the Arizona Department of Transportation Research Center, and contributing author to the Independent Institute book, Street Smart: Competition, Entrepreneurship and the Future of Roads, edited by Gabriel Roth.
S. Fred Singer, an atmospheric physicist, is Research Fellow at the Independent Institute, Professor Emeritus of Environmental Sciences at the University of Virginia, and former founding Director of the U.S. Weather Satellite Service. He is author of Hot Talk, Cold Science: Global Warming’s Unfinished Debate (The Independent Institute, 1997).
Dr. James L. Payne is Research Fellow at the Independent Institute and Director of Lytton Research and Analysis and author of numerous books, including A History of Force: Exploring the Worldwide Movement Against Habits of Coercion, Bloodshed, and Mayhem,and he has taught political science at Yale University, Wesleyan University, Johns Hopkins University, and Texas A & M University.
Ernest C. Pasour is Research Fellow at the Independent Institute, Professor Emeritus of Agricultural and Resource Economics at North Carolina State University, and author of Plowshares & Pork Barrels: The Political Economy of Agriculture (with Randy Rucker) and Agriculture and the State from the Independent Institute.
Randal R. Rucker is Research Fellow at the Independent Institute, Professor of Agricultural Economics and Economics at Montana State University, and co-author (with E.C. Pasour, Jr.) of Plowshares & Pork Barrels: The Political Economy of Agriculture.
Charles V. Peña is Senior Fellow at the Independent Institute as well as a senior fellow with the Coalition for a Realistic Foreign Policy, senior fellow with the George Washington University Homeland Security Policy Institute, and an adviser on the Straus Military Reform Project. Full Biography and Recent Publications
William Ratliff is Adjunct Fellow at the Independent Institute, Research Fellow at Stanford University's Hoover Institution, and a frequent writer on Chinese and Cuban foreign policies.
Ivan Eland is Director of the Center on Peace & Liberty at The Independent Institute and Assistant Editor of The Independent Review. Dr. Eland is a graduate of Iowa State University and received an M.B.A. in applied economics and Ph.D. in national security policy from George Washington University. He has been Director of Defense Policy Studies at the Cato Institute, Principal Defense Analyst at the Congressional Budget Office, Evaluator-in-Charge (national security and intelligence) for the U.S. General Accounting Office, and Investigator for the House Foreign Affairs Committee. Full Biography and Recent Publications
Jonathan J. Bean is Research Fellow at the Independent Institute, Professor of History at Southern Illinois University, and editor of the forthcoming book, Race and Liberty: The Classical Liberal Tradition of Civil Rights.
Anthony
Gregory is a Research Analyst at The Independent Institute. He earned
his bachelor's degree in American history from the University of California
at Berkeley and gave the undergraduate history commencement speech in
2003. In addition to his work with the Independent Institute, he regularly
writes for numerous news and commentary web sites, including LewRockwell.com,
Future of Freedom Foundation, and the Rational Review.
Dominick T. Armentano is professor emeritus in economics at the University of Hartford (Connecticut) and a research fellow at The Independent Institute in Oakland, Calif. He is author of Antitrust & Monopoly (Independent Institute, 1998).
Alvaro Vargas Llosa is director of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. He is widely published and has lectured on world economic and political issues including at the Mont Pelerin Society, Naumann Foundation (Germany), FAES Foundation (Spain), Brazilian Institute of Business Studies, Fundación Libertad (Argentina), CEDICE Foundation (Venezuela), Florida International University, and the Ecuadorian Chamber of Commerce. He is the author of the Independent Institute books The Che Guevara Myth and Liberty for Latin America. Full biography and recent publications.
Robert
Higgs is Senior Fellow in Political Economy at The Independent Institute,
author of Against Leviathan and Crisis and Leviathan, and editor of the
scholarly quarterly journal, The Independent Review. Click
here for a bio on Dr. Higgs, the noted economist and historian.
William Marina is Research Fellow at the Independent Institute in Oakland, Calif., and Professor Emeritus of History at Florida Atlantic University.
David
T. Beito is a Research Fellow at The Independent Institute, Associate
Professor of History at the University of Alabama, and co-editor of
the book, The
Voluntary City: Choice, Community and Civil Society. For further articles and studies, see the Center on Peace & Liberty and OnPower.org.
For further information, see the Independent Institute’s book on wasteful farm programs, Agriculture and the State: Market Processes and Bureaucracy, by Ernest C. Pasour, Jr.
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