The Problem, As Usual, Is The Government

Before the United States House of Representatives, Committee on Financial Services, Hearing on the Annual Report of the Financial Stability Oversight Council, July 25, 2012


Mr. Chairman, I welcome this hearing to receive the report of the Financial Stability Oversight Council (FSOC). The creation of FSOC underscores perfectly the complete intellectual bankruptcy underpinning the government's behavior towards financial markets. In the opinion of government leaders, the financial crisis was not caused by misguided regulation, interest rate manipulation, or government-caused distortions to the structure of production, but by a financial sector that was completely deregulated and laissez-faire. The response of legislators, therefore, was to create a new super-regulator with vast new powers to control the financial system.

Those who truly believe that the financial sector is deregulated might want to test their hypothesis by starting their own bank without the government's imprimatur, assuming that they are prepared to spend some time in a federal penitentiary. To say that the financial sector is deregulated could not be further from the truth. No other sector of the economy is as intertwined with the government as the financial industry.

Financial firms, especially smaller firms, suffer from costly and burdensome regulations that create barriers to entry in the market place and diminish competition. Excessive regulation ensures that only government-approved financial firms have a chance to enter the market. Those firms which are able to get through the hurdles are still at a competitive disadvantage vis-a-vis established firms who are better able to navigate the regulatory maze.

But not all of the government involvement is negative to the financial industry. Financial firms, especially larger ones, benefit from government bailouts, the first use of the Federal Reserve's newly created high-powered money, and membership in a government-sanctioned and -supported banking monopoly. Larger, well-established firms are not only better-suited to comply with the requirements of regulators; they are also more likely to receive bailouts from the government due to the entrenched policy of saving firms that are "too big to fail." The moral hazard of these bailouts is obvious, yet the government continues to subsidize large, poorly-run financial firms, to the detriment of investors, the financial system, and the economy as a whole.

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