Government-Supervised Financial Sector May Lose Value

By Cameron Smith

JPMorgan Chase recently disclosed a $2 billion trading loss associated with its principal risk management unit. For a bank with a capital base of almost $200 billion, a loss of $2 billion is more of a grand annoyance than a “systemic risk,” but the political rhetoric has been explosive. Despite the reality that taxpayer-backed deposits were not actually at risk, droves of politicians from the left are clamoring that JPMorgan’s loss is ample evidence that more government regulation is necessary while the political right is wavering on its commitment to repeal Dodd-Frank.

But, is federal control truly a better alternative? Greed, incompetence, and all sorts of other negative monikers could be applied to the American financial services industry at times. The same President, politicians, and bureaucrats who have shepherded almost $16 trillion in federal debt are gearing up the immense regulatory authority under Dodd-Frank to put the screws to banks concerning fiscally responsible behavior.

Dodd-Frank’s crown jewel is the Financial Stability Oversight Council. The council has ten voting members, nine of whom are federal government employees. Dodd-Frank tasks the council with “identifying risks to the financial stability of the United States”, promoting “market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure,” and “responding to emerging threats to the stability of the United States financial system.”

With such lofty goals of fiscal soundness, some might wonder if the council might do well to supervise the financial activities of the federal government. The ugly truth is that the council’s members already do! The council’s members include the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Director of the Federal Housing Finance Agency. Considering the federal government’s economic performance record, do Americans really want to give it radical control over the nation’s financial system?

Evaluating the financial performance of the U.S. government provides a startling comparison to JPMorgan’s recent activities. JPMorgan’s one-time loss accounted for about one percent of its capital base. Unlike those “sloppy” investment decisions, virtually every irresponsible financial decision made by the federal government is borne by U.S. taxpayers.

Since President Obama took office, the federal government has averaged annual deficits of $1.3 trillion. During this period, the “losses” for which the American taxpayers are responsible come in the form of generational indebtedness. This annual borrowing to fund reckless spending accounts for over sixty percent of average annual federal revenues.

Basically, the U.S. government would have been shuttered several times over if not for the capacity to borrow without meaningful limitation and millions of “depositors” who are compelled to contribute through taxes.

Financial regulation that informs the marketplace, improves consumer knowledge of investment risk, and streamlines the dissolution of failed entities may be prudent, but the controlling powers afforded under Dodd-Frank could quite literally result in the government control and supervision of America’s largest financial institutions.

Americans currently have numerous choices where they invest their hard-earned dollars. When one Wall Street bank proves irresponsible, several more are willing to take their business. But giving systemic control of all these options to those running the biggest “too-big-to-fail” entity in the world does not bode well for America’s financial future.

Cameron Smith is General Counsel and Policy Director for the Alabama Policy Institute, a non-partisan, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.

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