Thursday, October 29, 2009

TARP on Steroids

That's what Congressman Brad Sherman (D-CA) has called the new resolution authority proposal put forth by Secretary Geithner and the Treasury.

Resolution authority is the ability for the government to take over and somehow deal with failing financial institutions. There seems to be a fair amount of agreement that this was something lacking during the current crisis and that this authority is needed to avoid a repeat of the wave of bailouts the financial industry has been riding of late.

Treasury's proposal though, would be a step in the wrong direction. Here's Congressman Sherman's highlights:
The new Resolution Authority, set forth in Treasury’s 253-page legislative draft of October 27, 2009 provides permanent, unlimited bailout authority....

The Secretary of the Treasury has rejected a $1 Trillion limit on this bailout power

The chief economic effect of Treasury’s proposed unlimited bailout legislation is to cause creditors to lend money on favorable terms to “systemically important institutions” (the top 10 to 25). If the institution cannot repay those creditors, the Government probably will....

This law will allow those institutions which are clearly systematically important (the top 10 to 25) to borrow at a lower cost. This will help the largest institutions get bigger, so they can pose a greater systemic risk.
I suppose it's too much to ask anyone in government not use a crisis as cover for a huge power grab, but couldn't they at least make a pretense toward improving the situation?

This proposal seems little more than an attempt to put into law the system of business friendly back room deals that have proceeded ad hoc over the last year. If this is the shape "change" then we are in for a whole lot more of the same.

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