President Obama Believes in a Free Market, So Why Not Regulatory Policies That Would Promote It?

by Anthony Randazzo

President Obama appeared at Federal Hall in New York yesterday to reiterate his support for a massive overhaul of financial services regulation. At the center of the speech the president laid out his economic philosophy:

I have always been a strong believer in the power of the free market. I believe that jobs are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea. I believe that the role of the government is not to disparage wealth, but to expand its reach; not to stifle markets, but to provide the ground rules and level playing field that helps to make those markets more vibrant — and that will allow us to better tap the creative and innovative potential of our people. For we know that it is the dynamism of our people that has been the source of America’s progress and prosperity.

If this were the philosophy actually driving regulatory reform, it would be the biggest ray of sunshine in an otherwise cloudy field of government-expanding reforms (health care, energy, and college loans to name a few). Unfortunately, the plan the White House sent over to Congress in June does not line up with this statement from the president.

Instead, the bills now floating around the Rayburn House Office Building and Rep. Barney Frank’s Financial Services Committee propose reforms that will stifle innovation and restrict opportunities to create wealth. The White House plan, as proposed, would not create an even playing field for competition, but would give big firms a competitive advantage by labeling them too big to fail. Ultimately, the regulation reform proposals represent a massive power grab from Washington.

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The president criticized the doctrine of too big to fail (TBTF) yesterday, but his plan will create a tiered structure naming the biggest firms systemic risks to the system because of their size and interconnectedness. The proposed resolution authority would essentially act as a built-in bailout mechanism for those firms. So instead of ending TBTF, the president’s plan actually codifies the policy, essentially turning Wall Street’s biggest institutions into government-sponsored entities in the mold of Fannie Mae and Freddie Mac before the crisis.

Firms knowing they are TBTF with government protection will have a greater incentive to take risks. Lenders, knowing the TBTF firms have the backing of the government, will offer the cheapest of credit to JP Morgan Mae and Citi Mac, creating an uneven market. That’s not the level playing field the president wants.

The administration’s stated ideals for fostering conditions that will create better risk-taking practices and vibrant competition are great. But the leading ideas aren’t moving that ball forward.

President Obama said he wants to promote a “global race to the top,” inspiring companies to innovate and create wealth. But the restrictions he plans to put on firms like hedge funds and private equity groups will instead discourage entrepreneurship.

The president argued that businesses are best at creating jobs. But this doesn’t jive with the billions the White House has used to try and create jobs on its own, nor the plans to regulate in more compliance costs. The president’s speech supported the idea of free trade, but his decision to levy a tariff on Chinese tires last Friday says otherwise.

Instead of all this, why not promote policies that encourage businesses to take personal responsibility for their investments? Instead of labeling firms a systemic risk—i.e. too big and interconnected to fail—we could enhance bankruptcy laws to rapidly move an insolvent firm through the liquidation process. Serious consequences for failure would force firms to be more prudent.

There are a lot of changes that do need to be made. We need a more explicit delegation of responsibility for who is looking at systemic issues, like the expansion of subprime mortgage debt and over-rated securities. Banking regulation is overdue for some consolidation and streamlining. Insurance companies (beyond health) should be given a national charter option. Derivatives trading should probably move to an open exchange, while preserving the ability to create unique contracts.

Reforming Wall Street regulations is not easy, but it doesn’t have to mean a massive expansion of government. Fixing consumer protection law doesn’t have to mean a new, ill-designed agency.

For more on this see the new Reason Foundation study: “Rebuilding Wall Street: A Review of the White House Proposal for Reforming Financial Services Regulation” that takes a look at the Obama administration’s proposals for reform and offers some recommendations for ensuring that, instead of expanding government regulation and power, taxpayers are no longer forced to bailout banks or companies deemed “too big to fail.”


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Posted Sep 16th 2009 at 5:01 am in Economics, Obama | 211 Comments