The new plan would give the government authority -- similar to that long held over banks by the Federal Deposit Insurance Corporation (FDIC) -- to regulate big financial institutions that are not traditional banks but can have just as much of an impact as banks on the financial system. It responds to the experience of the past year when troubles at the investment firm, Lehman Brothers, and the insurance giant, A.I.G., played a key role in the financial meltdown.
There is a major difference, though. The FDIC, which has an outstanding record since 1933 of effectively safeguarding the public and depositors' interest while minimizing disruptions to the banking system, is an independent federal agency. It is funded by premiums paid by the regulated banks to insure their deposits and managed by a five-person board of directors that cannot include more than three members from one political party. The directors are appointed by the President and confirmed by the Senate but serve for fixed terms. The FDIC's relative institutional independence -- of both Congress and the President -- guarantees it a substantial measure of independence from politics and prevents it from being whip-sawed by politically-driven outbursts of irresponsibility such as we saw last week in the House of Representatives over the A.I.G. mess.
After the harrowing financial collapse of the past six months and the huge costs to the taxpayers of the bailouts, there is no question that the federal government needs to be able to regulate financial institutions of all kinds in the public interest. And perhaps Obama and Geithner would handle the expanded authority well. In adopting sweeping changes in the law, however, we need to be careful and take the long view of how such power will be exercised for years, even decades.
Since banks are regulated by independent agencies like the FDIC, I see no reason why non-banks should be regulated by the Treasury Department, with all the exposure to political influences that entails. Let's vest the new authority in an agency structured like the FDIC -- perhaps by expanding and redefining the mission of the FDIC itself.
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