"To what purpose are powers limited, and to what purpose is that limitation committed to writing,
if these limits may, at any time, be passed by those intended to be restrained?"
-- Chief Justice John Marshall, Marbury v. Madison, 1803

The Money Police

by West Virginia Rebel

Yay! More government authority!

Under the proposal, the S.E.C. would merge with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like.

The proposal itself began last year as an effort by the Treasury secretary, Henry M. Paulson Jr., to make American financial markets more competitive against overseas markets by modernizing a creaky regulatory system.

Mr. Paulson’s goal was to streamline the different and sometimes clashing rules for commercial banks, thrifts and non-bank mortgage lenders.

“I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years,” Mr. Paulson will say, according to a draft of a speech he plans to deliver on Monday. “I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible.”

Almost every element of the proposal would have to be approved by Congress, where Democratic leaders are already drafting bills to impose tougher supervision over investment banks, hedge funds and the fast-growing market in derivatives like credit-default swaps.

Mr. Paulson’s proposal for the Fed echoes ideas championed by Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. While both see the Fed taking a central role in overseeing risk across the entire financial spectrum, Mr. Frank is likely to favor a stronger Fed role, and to subject investment banks to the same rules that commercial banks must follow, especially for capital reserves.

Under the Treasury proposal, the Federal Reserve would become the government’s “market stability regulator” and would be allowed to gather information from virtually any financial institution. Fed officials would be allowed to examine the practices and even the bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the financial system.

“The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability,” Mr. Paulson said in the advance text of Monday’s speech. “To do this effectively, it will collect information from commercial banks, investment banks, insurance companies, hedge funds, commodity pool operators.”

That would be a significant expansion of the central bank’s regulatory mission, which has been limited primarily to supervising commercial banks. When Fed officials agreed earlier this month to rescue Bear Stearns, once the nation’s fifth-largest investment bank, they pointedly noted that the Fed never had the authority to monitor its financial condition or order it to beef up its protections.

Well, they wanted a socialized economy…

Look, I’m not against making financial institutions accountable. But anytime government steps in to “Fix” something, it’s often an accident waiting to happen.

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