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18 June 2009

Mark Calabria - A Fake Financial Fix

Mark Calabria, the new director of financial regulation studies at the Cato Institute, has written an op-ed in the 18 June 2009 New York Post entitled A Fake Financial Fix about the Obama plan to acquire further power over the financial industry while refusing to address the huge problems already caused by federal control over the banking system and in many respects over other parts of the financial system. This is worth reading.

Of course he asks how the government which was caught unaware of the Citibank and Bank of America problems might be expected to offer any real safety net to the broader financial markets. He failed to note that this same government forced Bank of America to take a $16 billion loss in acquiring Merrill Lynch, which weakened the Bank of America greatly. He notes that the federal plan will essentially designate some private institutions as too big to fail and will commit the government to future bailouts of those institutions. This provides these bigger institutions advantages in giving them lower interest rates for money they borrow and makes it harder for smaller financial firms to compete. This system would rig the financial markets to make the very big companies bigger and to protect them from competition. This is the usual pattern followed whenever government increases the regulation of business. It increases the cost of doing business and slows down decision-making processes. It distracts business management from making real business decisions by funnelling their time into handling government paperwork, petting government bureaucrats, and forcing them to devote more time and money to political influence peddling.

Calabria notes that 40% of the subprime mortgages passed through the hands of Fanny Mae and Freddy Mac, the government-sponsored institutions, which may cost the taxpayers more than $300 billion. This is twice the cost incurred in rescuing AIG. Despite this, these politician favorites are not included in the financial regulation plan by Obama. In other respects there is also no intention in this plan to reduce government efforts to encourage homeownership by subprime borrowers. This is really the way to address the problem, right folks?

As Mark Calabria notes, this is just politics as usual. The government messes up big-time and the problem is blamed on business or Capitalism. The government, in the throes of economic crisis, claims the solution to the problem is more government. It gets many big companies to go along with the grab for power by government by offering them special advantages and protected markets. It then moves quickly to pass new laws, before wiser heads have time to identify how what they are doing is foolish and above all before wiser Americans can inform the general public about how badly they are about to be taken advantage of. Small businesses and consumers are the big losers, even as the politicians and the main stream media will pretend that the increased government regulation is for the purpose of protecting them.

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