4/14/2010

The Newest Advancement in Eminent Domain

Senator Dodd's Financial Regulatory Reform bill will establish a new government entity under FDIC called the Financial Stability Oversight Council. This new organization will have the power to take over any company with $50 billion in assets or more that it deams too risky. This was explained (but buried) in the article GOP Takes Aim at Plans To Curb Finance Industry in today's New York Times.

"The Democrats’ bill, sponsored by Senator Christopher J. Dodd of Connecticut, would give the Federal Reserve oversight of the largest financial institutions, those with at least $50 billion in assets. And it would let the Treasury secretary — with support from regulators and the approval of a special panel of three bankruptcy judges — take over any giant company that posed systemic risk to financial stability, and essentially force it out of business."

Granting the Government an unchecked ability to take over the large private companies that appear to pose a "systematic risk" may well decrease the risk that financial institutions are willing to assume in lending to individuals and businesses. This would decrease liquidity and increase the likely hood of a new recession.

2 comments:

Eric said...

After reading the article and the post I started thinking about the effects of giving any very large company the ability to be backed by the government if management makes bad decisions. By specifying which companies will be eligible for government takeover it will give those firms an advantage. These firms will be able to sell their debt at lower rates than smaller firms, which gives them a huge advantage over small firms.

Dr. Tufte said...

Both of you are right - this is a horrible idea. They're trying to replace "too big to fail" with "too big to leave alone".