Death panels for banks?
posted at 10:12 am on October 27, 2009 by Ed Morrissey
A new bill in Congress to increase financial regulation would allow the federal government to seize institutions deemed “too big to fail” if Treasury saw a large enough risk of collapse. McClatchy reports that some on Capitol Hill have begun to refer to it as a “death panel” for banks, apparently more as a joke than a concern. Have any of them actually read the Constitution, especially the Fifth Amendment?
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, worked over the weekend and throughout Monday to draft the legislation. It would provide the government with first-ever authority to shut down large globally interconnected financial institutions.
Under this authority, jokingly referred to as “Death Panels for Banks,” the Federal Deposit Insurance Corp. would oversee the dismantling of large financial firms much as it does now when it intervenes in commercial banks that are at risk of insolvency.
Decisions about which institutions are so large that they pose a system-wide risk and must be monitored would be made by a Council of Regulators, comprised of leaders from the Fed, the Treasury Department, the FDIC, and other bank-oversight agencies.
This marks a shift, since Obama wanted the Fed to take the lead role as a “systemic risk regulator.” However, lawmakers in the House of Representatives and the Senate are wary of that, not least because the Fed didn’t foresee the gathering storm in mortgage finance that led to a near meltdown of the global financial order last year.
The FDIC has the power to seize banks as part of their voluntary association with the insurer. No one forces banks to use the FDIC; they know, however, that federal guarantees will make people a lot more likely to deposit their savings with them than a competitor without it. In exchange, the bank gives the FDIC the authority to seize the institution if it becomes insolvent or unstable.
This looks less like a voluntary association and more like a government takeover of the financial industry. Investors do not get guarantees when they give their money to firms like Goldman Sachs. They put their money into these accounts because of the risk and potential reward, not with an expectation of instant liquidity and safety. These are calculated gambles, intended to generate higher profits than savings accounts.
That doesn’t mean that the government has no role in regulating investor activities, perhaps especially on derivatives. But there is a big difference between sensible and productive regulation to sustain investor confidence and the outright seizure of firms from their owners for nothing more than incompetence. Incompetence in business has a solution — bankruptcy, and the freeing of resources for other efforts. It should not be the job of government “death panels” to decide when to seize a private business from its owners — and the Constitution made that plain enough 220 years ago.
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