Regulatory War of Choice

“A just war” is how Treasury Secretary Timothy Geithner describes the movement to expand financial regulation. “It’s a war of necessity, not a war of choice,” he is reported as saying about the battle to impose greater government control on the financial sector.

This is the man who presided over the New York Federal Reserve Bank as the Fed assiduously provided the monetary fuel for the over-expansion of credit and the associated property bubble. The eventual implosion of the twin bubbles caused the financial crisis of 2008.

For sure, markets are prone to ups and downs, because people are prone to behaviors like herding. And yes, bankers drank the spiked punch, as did myriad others from mortgage originators and real estate developers to over-extended households. But the Fed provided the heady stuff, thereby creating a boom-and-bust cycle of extraordinary magnitude.

Now, does Mr. Geithner’s proposed regulations seek to prevent similar nefarious policies in the future by limiting the Fed’s discretionary powers? Of course not. Silly even to ask. His quest is to expand the authority of government agencies, not to regulate them.

The one attempt to get a sense of what the Fed is up to, a bill by Congressman Ron Paul, has been destroyed at a Congressional sub-committee—even though it had 308 co-sponsors.

The fact that it is so hard even to get a very mild measure through Congress is a sign that there are powerful interests against regulating the regulators. Of course, it is understandable that Mr. Geithner’s former colleagues at the Fed would not want themselves to be audited—nobody likes being examined. It is understandable, too, that he’d side with them. But this is not a matter of blaming people or institutions for past deeds. We’re talking about loose canon policies that are almost sure to be repeated.

The Fed’s easy money was known as the Greenspan put—an inspired term that, ironically enough, came from Merrill Lynch. A put is a derivative, a contract that protects you against a fall in the price of a security. Wall Street believed that the Fed would open the money spigots whenever markets showed signs of sagging. Wall Street was right.

The Fed fostered asset bubbles. This was not an act of omission – failing to regulate banks – but an act of commission. Bubbles, as long as they’re expanding, make people feel good. Of course sooner or later they collapse, but Fed chiefs can keep things going for a long time.

And after the collapse, one becomes Treasury Secretary and calls for the increase of the bubble blowers’ authority. That is a war of choice, chosen because it is in the interest of the political elite.

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