America needs smart financial reforms that protect investors from fraud, address government regulatory failures and keep the government in the role of an unbiased quality-control technician instead of a corporate owner or bailout backstop. But if the Democrats in Congress get their way, we can expect more bailouts, more centralized control of our economy and more waste, fraud and abuse.
Indeed, when regulators are given unchecked power and limitless discretion, they become unmanageable. Too often, large federal agencies are swollen fat on the taxpayers financing, and with no profit-driven pressure to keep costs down, they end up wasting taxpayers money. Moreover, unchecked regulators are susceptible to abuses of power that deliberately favor some particular faction or constituency. And sometimes, unsupervised regulators and the largest business interests team up to scratch one anothers backs. We call that crony capitalism.
Waste, abuse and crony capitalism in that escalating order are the inevitable problems of big, unchecked government. Thats why Im skeptical of the Democrats plans to fix our financial system by setting up complex new agencies, staffing them with lawyers and bureaucrats, and giving the bureaucrats vague new powers and a blank check to execute those powers.
Nobody would argue that the financial industry doesnt need reform. I certainly dont. But we need reforms that will not entrench the same problems that have compromised smart regulation in the past and allowed the worst offenders to go undetected until years after they have absconded with billions of investors assets.
First, even well-meaning regulatory enterprises are prone to waste and mismanagement. Sometimes the waste results from outdated practices. Recently, Congressional investigators discovered that the Securities and Exchange Commission still reviews large companies lengthy financial statements manually using printouts, pencils and calculators decades after the entire private financial industry has adopted electronic tools that automatically analyze the numbers.
Sometimes the waste results from unmanageable, unwieldy structures. Currently, the chairman of the SEC has as many as 18 different organizational units reporting directly to her too many for even the most talented manager. Its no surprise that concentrations of power, rivalries and information silos have developed at that agency.
The Senate bill makes no attempt to address these inefficiencies at the SEC and other agencies. Instead, it sets up new regulators, while loading additional responsibilities and powers onto existing regulators, including the SEC.
Second, bureaucrats with wide, vague statutory authority sometimes abuse it to assist a favored group or narrow agenda. House Oversight and Government Reform Committee investigators discovered, for instance, that New York Federal Reserve Bank officials asserted control over American International Groups public statements and securities filings. They used this power to delete key details about AIGs taxpayer-funded bailouts details that would have revealed that AIGs derivatives counterparties were receiving 100 percent of their original investments. The cover-up benefited AIGs counterparties by allowing them to escape public outrage.
The Senate bill gives Washington bureaucrats the power to break up companies that in their judgment have become a threat to the financial system. This power, especially if never used except as a threat, would give the bureaucrats tremendous, easily abused informal authority over the private sector.
Third, full-blown crony capitalism exists when federal regulators effectively control a large company, protect it from competition and use it to pursue government goals. This is exactly what has happened to General Motors at the expense of customers, taxpayers and the long-term health of the American economy. Its also true of Fannie Mae and Freddie Mac which have for decades enjoyed government charters, artificially cheap capital and very little market-driven pressure to avoid risky choices. Yet the current version of the Senate bill allows Fannie and Freddie to continue their quasi-governmental, quasi-private lives. Moreover, the Senate bills permanent bailout fund would perpetuate dangerous expectations that the creditors of large companies are immune from risk.
Americans deserve smart financial regulatory reforms that simplify agencies like the SEC to reduce waste and restrain the Fed and others from arbitrary abuses of power. Smart reforms would end crony capitalism by cutting off taxpayer support of Fannie and Freddie and reinstitute capitalisms existing mechanisms namely, failure and bankruptcy to punish bad behavior and encourage prudence. Impartial judges must handle corporate failures, not federal regulators. Indeed, regulators must be given less discretion, not more.
We can achieve real, bipartisan, smart financial reform, but not as long as the Democrats insist on increasing the federal bureaucracy, controlling the economy from Washington and substituting bailouts for bankruptcy.
Rep. Darrell Issa (R-Calif.) is ranking member of the Oversight and Government Reform Committee.
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