Examiner Editorial: Wall Street reform bill enables more bailouts bailouts 

Senate Minority Leader Mitch McConnell is catching hell from the Washington establishment for having the temerity to tell the truth about the fine print in the Obama-Dodd Wall Street reform bill. McConnell is raising alarms about the proposal’s provision to make Washington bailouts a permanent feature: “It’s almost as if the people who wrote this bill took the pulse of the American people and then put together a bill that endorses the very things they found most repugnant about the first bailout.”

The Democrats have responded with a lot of jive. The bill’s chief sponsor, Sen. Chris Dodd, D-Conn., claims his proposal “will end bailouts.” The GOP leader is also being flailed by liberal journalists like Steven Pearlstein of the Washington Post, who during a recent WTOP interview accused McConnell of lying about the Dodd bill.

Apparently Dodd and Pearlstein haven’t talked to former Clinton administration Secretary of Labor Robert Reich who said of the Obama-Dodd measure that “yes, it preserves the possibility that the Fed could launch another bank bailout.” Or Tim Geithner, Obama’s own Treasury Secretary, who last October told the House Financial Services Committee that “a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses.” Or Richmond Federal Reserve president Jeffrey Lacker who said Obama-Dodd bill “just perpetuates the dynamic that gave us ‘too big to fail’ to begin with.”

The key problem with Obama-Dodd is that it establishes a new $50 billion bailout fund that can be used by the Fed to regulate all non-bank financial institutions that, according to the bill, are “systematically important.” That phrase is exactly the kind of vague language that Washington politicians and bureaucrats believe authorizes them to do whatever they think necessary — typically with tax dollars — to prevent the failure of any company they define as “systematically important.”  That’s a prescription for making bailouts permanent — and for limitless moral hazard.

Peter Wallison of the American Enterprise Institute succinctly describes what the consequences will be: “The market will see immediately that the government has created Fannie Maes and Freddie Macs in every sector of the financial system where these large companies are designated for Fed regulation, including insurance companies, hedge funds, finance companies, bank holding companies, securities firms, and any other kind of financial institution the government wants to regulate.”

These government-guaranteed firms will eventually force smaller competitors that aren’t government-backed out of business, with a result, according to Wallison, that consumers will have only “a few large competitors operating under the benign supervision of the government.” Pleasing politicians and bureaucrats will be these firms’ first priority, not providing competitive services to customers.

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