Please Obama, Step Back And Breathe

On a thread earlier today I had these comments in response to CStanley’s concern about the proposed authority for the government to seize non-financial banking institutions.

[The legislation would address] what Nouriel Roubini termed the “shadow banking system” which is far larger than the official banking system. There is valid concern that the government couldn’t even seize some of the big banks (or obviously AIG) even if it wanted to, which is a big problem when any of [them] could easily destroy the global economy overnight if they failed.

The primary concerns are like you and Yves point out. She points out all the legal implications; it’d be one thing if we were starting from scratch, but we’re not, and all the domestic and international law can’t just be rewritten in haste. I’ve been reading some stuff on other sites that is making me question the legal feasibility of nationalization, specifically the international aspects. I am more radical than many about what the government can do to capture failed institutions here, but most of the issues involve foreign laws and assets because the world has allowed these companies to become giant shell games. Still, even though those games are morally (and now financially bankrupt) we can’t just break international law.

…

To me it is becoming increasingly clear that political reform must come before financial reform, and I’m a wee bit skeptical that will come anytime soon. As such I am moving to the position that we should just set up a parallel financial system that is starting over from scratch with new regulations and guarantees, and let the old one live or die based on its own merit…

One of my primary complaints about the Bush Administration were the sweeping legal declarations that they could do pretty much anything to anyone. Even worse was that Congress affirmed a lot of those declarations.

Now I am very upset that they did torture and illegally spy on people, and think they should be brought to justice, but I also am aware that our government officials have been doing that for decades (I think they should be brought to justice too). What made me despondent however, was the codification of that behavior into legalisms, because while I did not think that Bush was going to become Dictator, I was (and still am) very concerned that dismantling the legal checks would make that situation more likely in response to the next big crisis.

Similarly, the economic crisis has generated these grand sweeping declarations of authority in similarly vague writing. Again, they do this not because their aim is to take over all this stuff, but because they don’t want to mess with any “hassles” so they make it as broad as can be. However, even though everyone knows what the aims are, so they would approve with a wink and nod, I do agree that it sets the stage for something bad down the line. That is the source of my apprehension to do things that would require massive legal authority, even if I agreed with the actions themselves.

It’s obvious that the shadow banking system has to be regulated, and it’s obvious that it is a problem that the government’s current powers allow it to only a) funnel unimaginable amounts of money into the system and hope or b) let them fail and bring down the global banking system. However, what is not obvious is that the broad authority they are asking for is the best way to do it. (Emphasis mine)

Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.

The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.

Congress has a Constitutional duty to dictate spending. Quite frankly, I think most of the guarantees and programs outside of the TARP money are unconstitutional already, if not from a legal standpoint, at least from a spirit of separation of powers standpoint. The Fed and Treasury has put us on the hook for trillions and trillions, without authorization from Congress. They claim that they have had to do this because of emergencies that made it so the legislation couldn’t be made in time. That’s very debatable, but even if it’s true, it shouldn’t be the status quo and the lack of push back from Congress has been appalling. Now the Executive is asking for this power to be enshrined into the hands of one person and the Fed? This doesn’t appear like it’ll operate like the FDIC which has very clear guidelines about its aims and goals, but rather a haphazard grant to save companies by “any means necessary.” I don’t trust that sort of power in anyone’s hands, let alone someone that has this exchange:

Rep Gresham Barrett: “The last question I have guys, which is the $64 million question or I guess I should say $64 trillion question is: What’s the backup plan? If everything fails what do we do? Where do we go from here?”

Treasury Secretary Geithner: “Congressman this plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It’s not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work.”

Mr. President, your Treasury Secretary and monetary/treasury policies in general have a lot of the same characteristics as the worst aspects of Bush’s Administration. I agree with the idea that the government needs to have an active role to help us transition through this difficult time, but we need to a more democratic, more skeptical and more legalistic framework. By failing to do so, we not only decrease the chance of success — because the fate of the country literally lies in the hands of a few that have egos to protect — but also increases uncertainty and diminishes participation from the populace, which will make people much more likely to turn on you if the policies don’t seem to be working. Get Congress to overhaul financial regulations of the shadow banking system that was never envisioned, but do it right. That means cooperation to reform international law, reassessment of bankruptcy procedures for financial companies, transparency about where the money is flowing and more interaction and specific legislation from Congress when special circumstances arise.

Oh, and firing of your Treasury Secretary if he isn’t on board…