Among the fiscal controversies that have occurred over the past few years, the newest one is the financial reform bill, recently signed into law by President Barack Obama. Over the next three blogs, I will going over a few facets of the bill I find particularly interesting. I will attempt to be as open-minded about the multiple aspects of the bill as possible.
First and foremost, under the new financial bill, the government maintains the right to manage “failing firms” that would have an impact on the United States economy. According to an article in csmonitor.com, this authority would be overseen by the Federal Deposit Insurance Corporation (FDIC). The interesting part is that taxpayers apparently would front the “initial costs,” that might be incurred by the failing of the particular firm. However, the firm would be required to coup the costs… up to $50 billion.
What I don’t understand is that under a simple, laissez-faire economic model, the taxpayer wouldn’t have to pay a dime for a failing firm – at least directly to the government in assistance to a failing business firm.
Let’s recap what led to our economic downturn. Certain banks gave questionable loans that could not be paid back. Suppose the bailouts had never occurred, what would happen? The banks who had adopted this questionable and overly-risky business model would have failed. Regardless of what government employees like to say, nothing is big enough to fail. They key to this scenario is that not every bank made these faulty loans, which means that banks that were big enough to do so, would have picked up the assets that the banks could not afford. As a result, the argument could be made that our economic downturn would have been worse, but shorter. No government intrusion required, and no taxpayer dollars go to businesses with proven faulty business practices.
The bottom line is that the taxpayers aren’t culpable with their life savings to cover the costs of faulty businesses. However, under this financial bill, the taxpayers must float the bill for failing firms.
In spite of needed financial reform, I cannot say that I agree that the government should have oversight of “failing firms”… I agree much less that the taxpayer should have to float the initial expenses. In my next blog, I will go over other aspects of the financial reform bill.
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