Obama to Give Capitalism Seizures

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So here's today's big story:

The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.

The government at present has the authority to seize only banks.

Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document.

The administration plans to send legislation to Capitol Hill this week.

A follow-up question: What will be the definitions of 1) "non-bank financial companies" and 2) "whose collapse would damage the broader economy"? Because if recent history is any guide, the answer will be 3) at the least, such non-financial and non-gargantuan companies as seat-cover manufacturers.

A brief history of time: In September, then-President George Bush signed into law the Emergency Economic Stabilization Act, which created the Troubled Assets Relief Program (TARP), authorizizing the Treasury Department "to purchase, and to make and fund commitments to purchase, troubled assets from any financial institutions." Note that this doesn't mean "take a controlling interest" in financial institutions, which is why the administration's new plan is such an eye-opener. Still, consider the ensuing politicization and mission creep:

* In November, GMAC, which is the financing arm of troubled automaker General Motors, asked the Federal Reserve to be designated as a bank, so that it could receive TARP funds.

* In early December, president-elect Barack Obama declared that "The auto industry is the backbone of American manufacturing," and therefore "I don't think it's an option to simply allow it to collapse."

* In mid-December, lame duck President Bush announced that GM and Chrysler would get TARP funds regardless of their decided non-bankiness, an action that Reason Senior Editor Jacob Sullum accurately described as "illegal by definition, not to mention unconstitutional." Obama called the move a "necessary step."

* In March, hands squarely on reins, the Obama administration announced that $5 billion in TARP funds would go to companies that couldn't even pretend to have a serious financing arm: namely, auto parts manufacturers. One of the bailed out suppliers, American Axle, has sales of just a couple billion dollars per year.

Now let's look back again at the original TARP-creating bailout, just six months before. Here's what then-Treasury Secretary Henry Paulson said at the time:

We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.

And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth.

We have proposed a program to remove troubled assets from the system.

Got it? TARP was specifically designed–actually I think "sold" is the technical term–to sponge up "illiquid mortgage-related assets" owned by giants in the financial sector. And in less than half a year it was being used to throw cash at manufacturing midgets.

There are many, many reasons to oppose giving the Obama administration "unprecedented powers" to nationalize companies. But surely here's one: If less-absolute power corrupted so totally in six short months, just how voracious will an unchecked Treasury be under unified Democratic governance? And if the root problem is indeed an "illiquid" market, how in hell do you incentivize the trading of assets and companies–in other words, liquifying markets–by empowering the single biggest financial entity in the country to pounce willy-nilly on companies based on political decisions?

This is disaster socialism at its unfinest, and for six months' worth of reasons why, click here.