Obama's New Battle Cry of Financial Regs: Too Big To Fail! Too Big To Succeed!

Writing in the Wall Street Journal, Peter Wallison the American Enterprise Institute zeroes in on the crux of Obama's new financial-sector regs:

The administration's plan would create what are essentially government-sponsored enterprises like Fannie Mae and Freddie Mac in every sector of the financial economy—insurers, securities firms, finance companies, bank holding companies, and hedge funds—where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners.

Moreover, the administration's proposal to provide a special bailout mechanism for large firms confirms the likelihood that these firms will never be closed down or liquidated. Citing the market turmoil that followed Lehman's collapse, the administration will argue that failures like this are "disorderly." But failure comes from risk-taking—the very source of our economy's strength—and it is ultimately risk-taking and its consequences that the administration's plan is intended to prevent.

Wallison uses the fates of Lehman Brothers and AIG to lay out the likely outcome of such a policy.

The turmoil following Lehman's failure occurred because market participants expected, after the rescue of Bear Stearns, that any larger firm would also be rescued. When Lehman wasn't, all market participants were required to recalibrate the risks of dealing with all others, causing a freeze-up in lending and hoarding of cash. Lehman's failure itself did not cause any substantial losses, and within two weeks of its bankruptcy filing Lehman's trustee sold its brokerage, investment banking, and investment management businesses to four different buyers.

Contrast this with AIG, the administration's paradigm, which was saved by the government because it was allegedly too big to fail. That firm is gradually wasting away under government control, with the taxpayers footing the bill....

The president has said on several occasions, including in yesterday's speech, that "I've always been a strong believer in the power of the free market." But his administration's prescriptions tell a different story. In AIG, GM, Chrysler, Fannie Mae and Freddie Mac we can see the future that the administration envisions for our economy—a sclerotic and unchanging structure of big companies working with, protected by, and relying on big government.

It's an important piece and one well worth studying (hat tip: Veronique de Rugy of Mercatus Center and The Corner).

Wallison gave a spell-binding talk on the "Roots of the Financial Crisis" at Reason Goes Hollywood, our 40th anniversary bash held last fall. Go here for downloadable versions, embed code, and more.

Click below to watch the 25-minute presentation.

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  • ||

    a sclerotic and unchanging structure of big companies working with, protected by, and relying on big government.

    Well, if that doesn't say Hope and Change, I don't know what does!

  • ed||

    big companies working with, protected by, and relying on big government

    Whoo-hoo! 1.4% returns forever! And safety to boot!

  • Baal||

    Obama is the Anti-Christ.

  • ||

    I love how they can use Freddie/Fannie as a good example.

  • ||

    So how many corporations does the government own or have a controlling interest in?

    GM
    Chrysler
    AIG
    Fannie
    Freddie
    FDIC
    Amtrak
    USPS

    I must be missing some here.

  • ||

    Wall Street Journal
    American Enterprise Institute

    No bias there! LOL

    Those people are PAID. For a living. To oppose regulation.

    And to say "Yes" to free money with no accountabilities.

    Ayn Rand would kick these people square in the ass.

    I'd also like to point out to ALL OF YOU PEOPLE that the industries in question here messed up in a major way. They are lucky to not be jailed. WE are lucky we are not in civil strife right now. The financial crisis is the result of a LACK of accountability, not TOO MUCH accountability. Doing nothing is always an option. Why don't those poor, poor victims of government bailouts try that? Huh?

  • ||

    Ray Butlers: You are aware that Fannie and Freddie lost billions and contributed to the financial disaster, right? Care to explain how replicating them is going to help?

  • Franklin Harris||

    So, is it OK to call Obama a socialist yet?

  • Kevin||

    The mere existence of Fannie and Freddie encouraged the bad behavior. If I send you to a casino with $10,000 of your own money, or $10,000 of your own money with a guarantee that I'll pay back any losses, in which case would you act prudently, and in which case would you act recklessly? The whole point in a free market is that if your own neck is at risk, you'll work to keep it safe. If someone else will always bale you out, why even try to make wise decisions? It distorts the market, and we end up with crises like this.

    Obama is just setting us up for more and bigger failures in the future.

  • robc||

    So, is it OK to call Obama a socialist yet?

    It always was.

  • Mike||

    Obama is not the Anti-Christ, he's Mussolini

  • Tricky Prickears||

    So, should I start changing my business model? Instead of using private banks and investors to back my business, and reinvesting profits, I should pay off the local, federal politicians in the hopes of getting big government backing? I guess I can start with federal grants and SBA set-asides.

  • Ben Kenobi||

    Remember when Obama said he wouldn't engage in scare mongering like Bush? Those were the good old days.

  • The Chad||

    Mike's got it right, this is fascism.

  • GG||

    The DiLorenzo compromise:

    Fascialism: The New American System

  • ||

    The administration's plan would create what are essentially government-sponsored enterprises like Fannie Mae and Freddie Mac in every sector of the financial economy...



    I would suspect that the Obama administration is making stuff up as they go along, just randomly throwing shit at the walls to see what sticks. But his followers keep assuring me that he's the smartest man to ever live.

  • LibertyMark||

    The double-think of people like Ray Butlers is never fails to surprise me, even though by now I should expect it.

    He thinks the financial industry was "messed up in a major way" (no disagreement there), and that they are "lucky to not be jailed."

    So, what does Ray Butlers want to do to them? Give them billions of dollars, insulate them from their risky decisions, and protect them from competition. Wow, what punishment! Oh, the humanity!

    I prefer the libertarian approach. You know, like, if you make bad decisions and act irresponsibly, then you live with the consequences.

  • John Kenneth Galbraith||

    In AIG, GM, Chrysler, Fannie Mae and Freddie Mac we can see the future that the administration envisions for our economy-a sclerotic and unchanging structure of big companies working with, protected by, and relying on big government.

    It is everything I have ever dreamed, and so much more. The Entrepreneur is dead! Long live the Technocrat!

    [Goes back to shoveling coal in the pits of Hell]

  • alan||

    So, what does Ray Butlers want to do to them? Give them billions of dollars, insulate them from their risky decisions, and protect them from competition. Wow, what punishment! Oh, the humanity!

    Where do I sign up for Ray's version of Club Fed?

  • ||

    Where do I sign up for Ray's version of Club Fed?

    At the DNC. Just bring your checkbook.

  • pmains||

    I would suspect that the Obama administration is making stuff up as they go along, just randomly throwing shit at the walls to see what sticks. But his followers keep assuring me that he's the smartest man to ever live.

    To the initiated, his schizophrenic policy approach is merely rationalism. Anybody else is an extremist. Read more here.

  • Doug Thorson||

    To Ray Butler:

    Please inform yourself about the facts. See the abundant amount of information about the cause of the financial crisis a the following link http://tinyurl.com/3q59ff (The Bailout Reader).
    If you want to be intellectually honest do some reading and then tell me that us that this crisis was caused by to little regulation. Until then don't show your ignorance publically.

  • Doug Thorson||

    Ray Butler:

    Here is a link for The Bailout Reader (tiny URL does not work on comments).

    http://mises.org/story/3128

  • IceTrey||

    big companies working with, protected by, and relying on big government

    Isn't that the very definition of Fascism?

  • ||

    PapayaSF-Can anyone name the logical fallacy that you just used?

  • ||

    LibertyMark

    There was no double-thinking in my post. I did not support the things that you assume I supported. We're not ALL partisan whores. Be careful what you assume.

  • ||

    uh, Doug. Was there a particular piece of information that you think that I am lacking? Be specific or be quiet.

  • ||

    Wall Street Journal
    American Enterprise Institute

    No bias there! LOL

    Those people are PAID. For a living. To oppose regulation.


    So let's ignore them and listen only to people who are PAID. For a living. To regulate. No "logical fallacy" there!

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