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The Case For The FDIC Over Tim Geithner

danps's picture

No Associated Press content was harmed in the writing of this post

On Tuesday the Washington Post reported on an effort by the Obama administration to get some new powers from Congress: the ability to seize control of certain non-financial entities like insurance companies and hedge funds. Coming a day after Tim Geithner's poorly received plan for Bailout II the timing could not have been much worse. Many economics and finance experts - those who have credibility by virtue of having sounded the alarm when the party was in full swing - such as Duncan Black and Paul Krugman have emphatically rejected the plan. Yves Smith wrote "Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is...to get broader authority to bail [firms] out." Joseph Stiglitz called it outright theft. (Very important exception: Nouriel Roubini has given his qualified approval.)

Yet the president wants the author of this plan to have a wealth of new powers, and exuberantly claims "I think [he] is doing an outstanding job" (which has unnerving echoes of Brownie's heck of a job). Geithner does not need votes of confidence at this point. He needs instead to find a monastery in some distant and isolated land, go to an empty room in a quiet and remote part of it, unroll a somewhat comfortable rug, sit on it and meditate until he is able to envision a world without Goldman Sachs. More bluntly, he comes across as someone narrowly locked into one specific way of seeing the world, and this poverty of imagination is forcing him to offer the same solution over and over.

It may not be a coincidence that the inability to think creatively is so proximate to the claimed need for more power. Perhaps Obama's economic team is crippled by the same sclerotic thinking that infected the Bush administration's national security team, which seemed to manifest itself in a never ending list of demands for more power. It leads to the following proposition: The amount of authority an individual claims to need to do a job is inversely proportional to his or her competence. Extravagant requests are more likely to be born out of insecurity (beforehand) or guilt (afterwards). While not strictly true, it may be a good rule of thumb. The good ones pay attention even when not under scrutiny and make do with what is at hand.

Previously it was the need for basket warrants, the obviating of FISA, the wholesale sweeping of electronic communication, and so on. The message was always the same: We urgently need these to keep America safe, with the implication that if they had been there all along maybe 9/11 would not have happened. Compare to now: We urgently need these to properly regulate the financial system, with the implication that had they been there all along the financial meltdown would not have happened. But as Marcy Wheeler points out in a great overview of Matt Taibbi's Rolling Stone piece, the biggest problem at Treasury was the inability of the modestly scoped Office of Thrift Supervision to keep up with the wave of new responsibilities deregulation flooded it with. Which may have been by design. But in any event the issue was not an inability to seize control of these businesses.

The biggest problem with the proposal, though, is that it seeks to vest large new powers in the executive branch when we already have a well functioning agency to model it on. According to its site the FDIC is an "independent agency of the federal government" that is "managed by a five-person Board of Directors, all of whom are appointed by the President and confirmed by the Senate." Look at the list of banks it has taken over in the last couple of years. Have they been controversial? Has anyone claimed political motives, corruption or incompetence with any of them? It seems to be an agency that focuses very effectively on its mission and manages to stay out of turf wars. Isn't it reasonable to think that its independence along with required collaboration between the president and Senate has helped make it so? Why not just plug the new oversight into a framework even the president acknowledges is working? Why put all that new authority into just one person - one who may not (ahem) enjoy the full confidence of the public or who may appear compromised by industry ties? Why attempt to cut Congress entirely out of the process? It is hard to look at this as a good faith effort to restore confidence in the financial system; it looks more like a power grab from the Bush playbook. The administration is better off not pursuing it.

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Submitted by jawbone on

real objective. Divorced one like Bush looks at the role of the once obscure Office of the Comptroller, which BushCo used to prevent states' Atty Gen'ls from investigating the Biggest Bankster Boiz and feels very uncomfortable aout this new power grab by a US president.

This past weekend I wrote about the OCC, Office of the Comptroller of the Currency and 4 rulings that this office has made over the last two presidencies.
1. Preventing state AG's and the state banking departments from investigating and regulating national banks. 2004.
2. Allowing Banks to become real estate developers and managers to including wind mill operations. 2006
3. Asserting that credit card insurance via telemarketing was not insurance and thus again immune from state AG's and the state insurance departments. 2002 This particular ruling being the result of the Gramm-Leach-Bliley Act of 1999. The act that is now pegged as THE deregulating action of the current economic mess.
4. Allowing banks to sell insurance. 1996.

All four are clearly rulings that can have lines drawn directly to the what we are hearing today as to why the alphabet soup of “financial products” created by “to big to fail” entities have required a combination of delivering funds and pledging funds to the tune of around $9.5 trillion dollars. I googled the current number and could only find numbers dating from December 2008 such as this site suggesting then the total was $8.5 trillion.

We really need to start talking about the OCC. It is a player, if not the behind the scene player of a lot of what has become our financial system. Note, I did not say banking system. That is key.
SNIP
The FDIC is already the entity with the power that Obama is now requesting for his surrogate. On the plus side in my book, it is an agency created from the destruction of the last time we were here. It is a New Deal institution and that makes it clean in my mind (at least cleaner than more recently created entities). So, even if I'm wrong, and I don't think I am because this nation for 13 years now has been blurring the line between banks, insurance and recently real estate to the point that it is one big industry and that counts when you go in front of a judge, the correct request that we should have been hearing from Obama is to expand the definition of banking to clarify all these new mongrel banking entities such that the entity this nation created specifically to do what the Treasury is asking for can do the job without question of jurisdiction. Simple, neat, maintains separation of power and not bureaucracy expanding.

I've been wondering why, if big financial institutions need stricter regulation and possibly need to be taken over, why not expand the FDIC, the organization which has expertise in doing such things?

I also thought immediately of Lieberman's proposal to fold so many agencies into his proposed Homeland Security organization, which we now think of as a mistake.

Power, it's what's for the executive branch!

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Submitted by TreeHugger on

"The amount of authority an individual claims to need to do a job is inversely proportional to his or her competence. Extravagant requests are more likely to be born out of insecurity (beforehand) or guilt (afterwards).. "

Submitted by jawbone on

Jane Hamsher intros her for Q&A with Firedoglake readers, quotes this from Prins' Mother Jones article:

I've never been a fan of any toxic asset purchase plan (nor of the capital injection through stock purchase plans). Randomly buying a bunch of heavily layered, heavily leveraged securities and expecting them to be profitable some day has never made sense to me, especially when nothing is being done to bolster the underlying collateral. The White House and Treasury Department are throwing money at the banking and finance industry, while simultaneously doing little about the loans and borrowers at the bottom of the crisis—not to mention the very risky and overleveraged structure of the banking system itself.

The administration is caught up in crafting big plans to solve the problems of big banks. Instead, it should be dissecting the system into transparent, quantifiable, and understandable parts—and then dealing with those elements that can and should be assisted. Geithner ought to jettison the too-big-to-fail nonsense and keep it simple: Break up the banks into their commercial and speculative parts, and separate the assets along similar lines. Let the speculative parts die, and tend to the rest. As it stands, the present solution—propping up the entire system in a complex, highly leveraged manner that depends on the kindness of the culprits that caused this mess—is a colossally expensive exercise in bipartisan stupidity. (My emphasis)

If only....

She says a lot of things which have been said here.

Dan, thanks for covering this topic.