The Washington Post reports on the latest initiative from the Obama administration to tighten oversight on financial markets.  Obama wants Congress to approve an expansion of Treasury’s power to seize wobbling banks to a host of previously-unregulated firms on the basis of economic stabilization.  It portends a growth in stifling oversight and a further intimidation of the kind of capital investment needed to restart the economy:

The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.

The government at present has the authority to seize only banks.

Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president’s Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document. …

Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers.

The administration’s proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed’s other responsibilities, particularly its control over monetary policy.

The regulatory oversight for banks exists in part because of the public-private relationship between the government and the banking industry for controlling monetary policy, and in greater part because of the banking collapse of the Great Depression.  The government acts as a guarantor for depositors up to a certain amount, keeping customers from conducting bank runs.  In exchange, the FDIC has the authority to seize a bank that threatens that system.

However, people do not deposit cash in hedge funds or insurance companies.  They invest in them, and assume certain risks when they do.  The Obama administration wants to socialize the risk by placing the government as a guarantor of sorts for the investors, but that will make people less likely to invest rather than more likely.  Part of the lure of investing comes from the potential reward of greater growth of funds than what can be found in bank accounts and bonds.  Limiting risk means limiting gains, and we can expect investors to shield themselves further than they may have in the past under those circumstances, while government spends more money in regulatory activity and the economy sags from lack of capital investment.

And that’s assuming we have a Treasury competent at the task.  As Byron York notes, we hardly have a Treasury at all:

Late Monday, the Obama White House announced it has finally found a candidate to become the number-two official at the Treasury Department under Secretary Timothy Geithner.  Turns out he was in the White House all along.

Neal Wolin, a veteran of the Clinton Treasury Department who last month left his post at the Hartford Financial Services Group to become a White House economic adviser, will now become Deputy Secretary of the Treasury — if, that is, his various seven-figure bonuses and stock options from Hartford pass populist muster on today’s Capitol Hill.

Obama also found candidates for a couple of other top Treasury jobs.  But they face what could be weeks of investigation and confirmation proceedings in the Senate. And that means that at this moment — when we’ve just had the unveiling of Geithner’s long-awaited plan to deal with the toxic assets that still threaten the economy — it’s quite possible we could reach May with just a handful of top officials staffing what is arguably, in this financial crisis, the most important department in the U.S. government.

Team Obama complains that its new ethics standards keep them from making appointments any faster.  However, Wolin doesn’t pass muster, either, as I wrote when he received his appointment:

Wasn’t this supposed to be the start of an era of competence and freedom from conflicts of interest in government?  After appointing lobbyists William Lynn and Mark Patterson to positions that they would have lobbied prior to their appointments, Obama has named [Neal Wolin,] a financial-service executive that applied for a bailout to be his deputy counsel on economic affairs …

Patterson also worked for a bailed-out firm, the massively politically connected Goldman Sachs.  Now we get another executive from a politically-connected firm, and not even one that’s successful.  If we had to bail out Goldman Sachs and Hartford, it doesn’t exactly speak well of their economic acumen.  Why do we keep picking people from firms that couldn’t stand on their own?

Obama has started to worry some of the Hopier-and-Changier crowd with his serial violations of his own ethics rules.  This makes the third questionable appointment in nine days, transforming Obama’s violations of at least the spirit of his own ethics rules a pattern and not exceptions.  It’s not just the bailout, either.  Hartford also has lobbied on insurance regulation policy, pushing hard against the federal control that Obama promised in his campaign. CREW and other watchdogs have become restless, and it’s only the second week of the new administration.

Obama’s ethics policy would require Wolin to recuse himself on both the bailout and on insurance regulation, which makes people wonder what exactly Wolin would do as economic counsel.

Wolin will now get to help out with the bailouts directly after benefiting from them himself.  Have they just decided to chuck the ethics policy altogether?  Maybe the Senate would like to ask that question in the confirmation hearing, but with all of the new authority Obama wants to give Treasury, they may decide that staffing is a higher priority than ethics.  They certainly bought that argument with Geithner, after all.

Are these the people we want making decisions about seizing private firms for their idea of “stability”?