STAFF NEWS & ANALYSIS
DC Begins the Bust Up
By Staff News & Analysis - September 01, 2010

FDIC sees rule early next year on dismantling firms … U.S. regulators aim to have a final rule early next year that will lay out how the government can dismantle financial giants if they are headed toward collapse, bank regulator Sheila Bair (left) said on Tuesday. Bair, who heads the Federal Deposit Insurance Corp, the agency that will be responsible for this resolution authority, said the regulators will first issue an interim rule that will be a vehicle for getting more detailed comments. – Reuters

Dominant Social Theme: No bailouts anymore!

Free-Market Analysis: So now the government is to step in and undo companies that are "headed" for collapse. This seems to us yet another step forward into a kind of bizarre alternative universe where free-markets are controlled and free-enterprise is managed. Anyone who has lived more than a few decades on the planet in a Western regulatory democracy must know at this point that regulatory authorities consistently fail. A larger dominant social theme here is, "We just have to keep trying until we get it right."

But perhaps this dominant social theme itself is beginning to lose credibility. Regulation after all is simply nomenclature for government using force to tell people and businesses what to do. Each one of these modern omnibus bills provides more of a precedent to simply state the problem in arcane terminology while leaving the "details" up to regulatory authorities themselves. In practice this means that industry shows up on the doorstep and a great deal of behind-the-scenes horse-trading occurs before a finished product is unveiled.

In such leviathan bureaucratic environments as the European Union and America, the creation of legislation can go on for months and years before it is finally voted on, reconciled and signed by the president. But now in the modern model, that is only the beginning of the process. There is a whole regulatory overlay that is far more informal but just as important. As regulators are inevitably subject to "regulatory capture" by the largest entities that they attempt to regulate, what this process means in practice is that those private groups with the most money and power are the ones with the most influence.

The American exception has traveled from a republican democracy to a back-room exercise in influence peddling. It has gone from a fairly transparent system to one that lacks even the most elemental checks-and-balances at a fundamental level. No one will ever understand the horse-trading that goes on or loopholes that have been created via these behind-the-scenes regulatory exercises. This hardly can be called legislating anymore. It is a form of pocketbook law.

But all of the above pales in significance to the intent of the law itself. By putting in place central banking with its chaotic money surges and inflation, the powers-that-be guaranteed that they would end up with boom-busts cycles that would exacerbate bankruptcies. By continually centralizing power and influence via fiscal and monetary policy and an endless flow of financial regulations, the same groups created a highly centralized money industry with only a few massive players. This is the evolution of "too big to fail." And now those in Washington DC and others as well will be empowered to take these firms apart if it "seems" that they are headed toward failure. The kinds of bureaucratic blackmail and back-door infighting that such regulations promise is both expansive and disheartening. Here's some more from the article:

The law deals with the issue of banks perceived as "too big to fail," in part by forcing big financial companies to write living wills that regulators would use to dismantle them if they became insolvent. The lack of such a mechanism forced the U.S. government to treat shaky financial giants on an ad hoc basis during the crisis — crafting massive bailouts for companies such as AIG (AIG.N) while letting Lehman Brothers (LEHMQ.PK) collapse. Financial companies, investors and counterparties are eager for details on how the resolution authority will work, including the treatment of creditors. They will also deploy substantial lobbying power during the rule-making process to influence the final regulation.

We can see from the above yet another exercise in "stakeholder" regulation in which private property is treated as a public good. The ownership system continues to be compromised on all economic levels. A small quasi-public group already has control over the price and quantity of money. Now, in some sort of vaguely coordinated way, regulators and legislators will exercise control over the life and death of the lumbering corporations that the system has produced.

It is disheartening to contemplate the place from which the United States began and where it has arrived at. The nation itself is reeling from a Great Recession and continued joblessness. Meanwhile, legislators across the country and especially in Washington DC continue to elaborate on the failed system of regulatory democracy that produces only further centralization of power without successfully anticipating or helping to avoid a single major crisis.

After Thoughts

The democratic regulatory meme is one of the most persistent and successful of all power-elite dominant social themes. But it has been in place for over 100 years now and practically speaking has not exhibited success. Regulation, in the modern era, therefore, can increasingly be seen as a way-station to tyranny as there is little that is sensible to support its continued application but much that encourages increasingly authoritarian excesses. When an erstwhile republic comes to the point where "regulation" is passed that allows the government itself to monitor larger entities for "failure" and threaten them with liquidation, one must begin to wonder whether the "point of no return" has been reached between what was private enterprise and is now merely an evolving, merciless Leviathan.

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