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April 19, 2010
Originally published in Biggovernment.com
Liberal pundit Michael Kinsley once defined a political gaffe as an instance of a politician accidentally telling the truth. House Financial Services Committee Chairman Barney Frank, D-Mass., recently made a gaffe that fits Kinsley’s definition to a tee.
In a debate with Ralph Nader on MSNBC’s “The Ed Show,” in which Nader was accusing Frank of being too timid on the financial regulation bill then moving through the House, Frank responded, “We are trying in every front to increase the role of government in the regulatory area.” Conservative blogs took note of Frank’s use of the word “every front”, as did Rep. Paul Ryan (R-Wis.), and earned a brusque “tsk- tsk” from The New Republic’s Jonathan Chait.
This is an example of “the conservative misinformation feedback loop in action,” Chait exclaimed. Frank was only talking about banking, Chait claimed, and “not confessing to a plan to expand government in every area.”
Actually, in prefacing his comments, Frank moved the topic from Nader’s point about derivatives to the broader issue of how “the right wing took control of government and ruined it” and how it is supposedly benefitting from its “own incompetence.” But if one still doesn’t want to take this as Frank’s confession of wanting to increase government intervention “in every front,” one need look no further than the bill by Frank that passed the House in December and Chris Dodd’s Senate “financial reform” bill that Democrats are trying to ram through the Senate.
In the debate, Democrats never tire of accusing Republicans of siding with “Wall Street banks.” But last week Republicans made headway when Senate Minority Leader Mitch McConnell pointed out that the bill $50 billion resolution fund would institutionalize bailouts for big banks, whether these banks failed themselves or acted as creditors to too-big-to-fail institutions. Even an editorial in the Washington Post stated that “Mr. McConnell is partly right” and that “creditors might fund systemically important firms on artificially advantageous terms, thus enabling them to grow bigger and riskier.”
But the same editorial wrongly asserted, as many have, that “Wall Street would provide the $50 billion fund” entirely. Putting aside the fact that taxes on any firms are always passed on to some extent throughout the economy, the fees for this fund would come from the broad category of “financial institutions” defined by the Dodd bill.
I previously wrote in BigGovernment.com that this category will likely include home and auto insurers, such as Geico, Allstate and State Farm — relatively stable firms that had virtually nothing to do with risky bets that led to the financial crisis. But now, experts looking at the bill’s language see that the bill’s specific coverage of “nonbank financial companies” could mean taxation, regulation, and even possible nationalization for a wide variety of Main Street businesses, who would suddenly find themselves under the direct supervision of the Federal Reserve Board, the bill’s designated regulator for “systemic risk.”
“The legislation … gives the Federal Reserve power to regulate any large company in America.,” writes Gregory Zerzan, former Deputy Assistant Treasury Secretary in the Bush administration, in the Wall Street Journal. “The current proposals for “financial” reform are stalking horses allowing government intervention into virtually every facet of the U.S. economy.”
The 1,336-page Dodd bill — called the “Restoring American Financial Stability Act” — defines “nonbank financial company” as any business that is “substantially engaged in activities in the United States that are financial in nature.” Note that there is no requirement that these firms actually be affiliated with a depository bank or a broker-dealer.
As Dorothy Coleman, vice president for tax policy of the National Association of Manufacturers (NAM), has noted, the bill could have clarified matters by using the tighter phrase “predominantly engaged” in financial activities. But instead, the Dodd bill’s “covered companies are defined as those with ‘substantial’ financial activities and the Federal Reserve Board gets to decide who falls into the definition.”
Coleman wrote that U.S. “manufacturers that engage in routine financial activities as a small part of their main business, e.g., a global manufacturer that manages a foreign exchange trading operation, an equipment manufacturer that provides financing for customers, are concerned that they could be pulled into the systemic risk regulatory regime, drawing needed capital from their businesses and imposing new administrative burdens.”
And Zerzan noted that “financial activities,” as defined by the law the Dodd bill makes reference to, could “include things non financial businesses do everyday like extending credit to customers and holding downpayments on deposit, or even managing a company’s own investment portfolio.” According to Zerzan, the Fed could turn IBM, Wal-Mart and Boeing into “financial” businesses.
And once these businesses become “financial,” the Dodd and Frank bills give the Fed virtually unlimited power over them. This includes the specific power to seize, or nationalize, them if they are deemed to be too much of a “systemic risk.” An Obama administration white paper from last June called for the government to have “broad powers to take action with respect to the financial firm,” including “the authority to take control of the operations of the firm or to sell or transfer all or any part of the assets of the firm.” The Frank and Dodd bills largely follow this directive.
The bill’s broad definition of financial company was apparently one of the reasons that Sen Bob Corker (R-Tenn.), who has become the media’s favorite Republican on this issue for his efforts to seek compromise, has so far not come to agreement with Dodd and signed on to the letter of opposition from all 41 Republican senators. To his credit, Corker told the Washington Post’s liberal blogger Ezra Klein that “the biggest issue is narrowing what the Fed is able to do,” and that the Fed’s new authority should “clearly, solely to apply to financial institutions.”
But just after saying that to Klein, Corker immediately reverted back to “get along” mode, saying: “I think the rhetoric has been overheated, and I’ve cautioned against it. Little words mean a lot here.”
Words do mean a lot, but given the boiling that the bill has in store for Main Street businesses, the problem isn’t that opposition rhetoric is overheated. It’s that the lukewarm criticism is not nearly hot enough.