Government Wants More Power

I KNOW. So what else is new? The Obama admininistration “will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies” in their overhaul of financial regulation, according to Stephen Labaton at The New York Times. Some of its ideas aren’t too bad.

It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated.

There will be new powers for the Federal Reserve to supervise and seize institutions. And of course, supervision of executive pay. That’s a natural for a politician. There’s nothing more delightful for a man disposing of billions of dollars in taxes than to browbeat a man who only makes millions.

As usual, these progressive power addicts miss the point. The point is to reform the financial system so it doesn’t need close supervision, so that troubled financial firms wouldn’t threaten the whole system.

We know how to do this. It is pretty simple. We lower the leverage ratios of financial institutions. You see, this isn’t that hard. A company can’t get into trouble unless it has high debt. If its capital is mostly equity then a reduction in earnings isn’t the end of the world.

That’s on the financial supply end. On the demand side we could limit the amount of debt that consumers could carry and reform the system so that it features more equity. For instance, instead of an 80 percent mortgage, a homeowner could take out a 50 percent mortgage and finance the rest with an equity partnership.

But don’’t look for liberals to reform the financial system to make it less risky. That’s not the way of the liberal.

What liberals want is power. They want to boss around the financial industry and they want to convert its resources to support their own project of power and patronage.

So look for our liberal friends to crank up the leverage and crank up the political supervision of the private sector. That way they benefit twice. They benefit because a highly leveraged financial industry is susceptible to failure, and when the financial system fails, liberals win. And they get to extract tribute out of the industry because of the power they have over it.

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Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.