“Fact and Comment” STEVE FORBES

Posted By on March 25, 2010

STEVE FORBES, Forbes.com “Fact and Comment” (3/25/10): Socialists believe
that the way to paradise is for governments to own “the means of
production.” Thus, decades ago even democratic countries such as France
and Britain nationalized considerable swathes of their economies to
achieve “social justice.” That didn’t work so well; therefore, since the
days of Margaret Thatcher there have been wave after wave of
privatizations in Europe and around the world.
 
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
(FNM) and Freddie Mac (FRE) 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.
 
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.
 
The Dodd bill is an open invitation for government to micromanage the
whole breadth of finance in America, including even your local pawnshop.
Nationalizing the U.S. financial system without formally nationalizing
it–Karl Marx would be drooling in delight ….
 
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