August 31, 2016

August 31, 2016 | Commentary on Financial Regulation

They Came For MetLife, And I Said Nothing, Then They Came For Home Depot

The latest round in the battle between MetLife and the Financial Stability Oversight Council (FSOC) is officially underway. MetLife has filed its brief with the U.S. Court of Appeals for the D.C. Circuit.

The donnybrook began in September 2014, when the FSOC, a sort of super-regulatory agency created by the 2010 Dodd–Frank Act, tagged MetLife for special regulation by the Federal Reserve.  People commonly call firms so designated systemically important financial institutions, or, SIFIs.

MetLife fought the designation in federal court, and this March the U.S. District Court in D.C. rescinded it.  (The court unsealed its decision on April 7).  U.S. Treasury Secretary Jack Lew, the FSOC’s Chair, immediately announced the agency would appeal.

The government will file its own brief in early September, and oral arguments in the case should soon follow.  The outcome of the appeal has obvious implications for MetLife, which doesn’t want to be stuck with costly regulation or the SIFI label—the equivalent of festooning company headquarters with an official “too big to fail” sign.

But the decision has broader implications for other, yet-to-be-singled-out financial firms, as well as for the free-enterprise system itself.

The entire FSOC-scheme is built on the false premise that government-run bank-style regulations can prevent financial crises.  It would be a minor policy quibble if it weren’t for the fact that government policies tend to be a main contributing factor in virtually all such events throughout history.  That’s bad enough, but the FSOC arrangement goes well beyond mere rules and regulations for banks.

The FSOC’s duties and responsibilities ultimately imply that the federal government should be able to control day-to-day decision making in the private sector.  On the surface, the FSOC is confined to monitoring only a small part of the financial industry, but there’s a great deal beneath the surface.

The very same logic behind the FSOC and its special regulations for financial activities can easily be expanded to justify government controls on firms in any industry.  All companies are involved in financial decisions, so all are potential targets.

Incidentally, we’ve already seen some of the same logic applied to the auto industry when Chrysler, and more recently, General Motors were in trouble.  The logic wasn’t used to justify the same degree of government involvement in those cases that we see in Dodd-Frank, but it’s a very small step from “government support” to “protecting the taxpayer.”

U.S. policymakers long ago decided that intense bank regulation is justified to protect taxpayers, the ultimate backstop for bank failures via the Federal Deposit Insurance Corporation (FDIC).  And saving banks from bank runs was, of course, thought necessary to protect the economy from wider damage.

In the wake of the 2008 crisis, we’ve essentially extended these principles to the non-banking financial industry – Wall Street – as well. It’s not much of a leap to extend these ideas to the non-financial sectors of the economy.

For instance, Lowes and Home Depot (combined) have roughly 4,000 stores in the U.S.  Both are principal suppliers for the retail do-it-yourself crowd and for commercial home builders.

Lowes handles almost 20 million customers each week and employs nearly 300,000 people.  The Home Depot employs more than 300,000.  The companies stock roughly 36,000 items in their stores and sell between $50 and $100 billion worth of goods each year.

All those employees depend directly on the companies for their livelihoods.  For any worker living paycheck to paycheck, a Home Depot (or Lowes) bankruptcy would be even worse than if their bank failed.  Deposits at the bank are FDIC insured, but that doesn’t generate the next paycheck.

And if Lowes or Home Depot doesn’t sell all those products, the companies that make those products will suffer.  Some of those suppliers surely would not yet have been paid for the products that are on the shelves at the time of a bankruptcy filing, so a Lowes/Home Depot bankruptcy could easily strain those suppliers’ finances.

Naturally, it will be more difficult for them to borrow money once their main customer is bankrupt, so this situation endangers the financial livelihood of the suppliers’ employees.

Furthermore, all of these people involved might take the precaution of saving more money (rather than spending it on consumer goods) because they fear losing their jobs.  In other words, a panic could slow down the economy even without a single massive layoff.  Clearly this situation is a threat to financial stability.

It’s even easier to run through an example like this using Walmart, a company that employs more than 1 million Americans.  Walmart sells food to millions more, with a supply chain that traces back to farmers.

So we’re really only talking about degrees of difference between large financial and non-financial firms.

It’s easy to see that the failure of, for example, Citibank, endangers millions of depositors’ checking accounts.  While it may not be as obvious, the truth is that, if Citi were to fail, it would present no greater danger to people’s ability to earn a living than the failure of a Walmart or a Home Depot.  In both cases, we’re talking about people’s money and their ability to earn more of it.

And thanks to Dodd-Frank and the FSOC framework, we’re not just talking about regulating banks anymore.  We’ve moved well beyond the average American’s checking account.

Now, our policies pretty much assume that if an investment banking firm can’t immediately finance itself in exactly the same manner it’s used to, it poses such a great danger to society that it justifies massive government regulation and micromanagement.

And that brings us to the very edge of insisting that, for all types of companies, the U.S. government should be able to dictate all of the following: the type and amount of capital a firm must have, exactly which products and services it can offer, which assets it can hold, how much it can distribute to shareholders, which companies it can merge with, which part of its operations must be sold off, and, if all that fails, who can manage the company.

It’s patently absurd that we’re doing all of this in the name of safety when it’s clear – throughout history – that federal bureaucrats are no better than the private sector at figuring out which assets and activities are safe.  These government regulations are generally inefficient relative to other types of government intervention, and they create a false sense of security, thus adding to instability.

The only way to improve market stability and resilience is to reduce invasive regulation and micromanagement, and force firms to bear their own financial risks.  Markets regulate themselves when customers and investors have the proper incentives to monitor what firms are doing. Complex regulatory structures (and taxpayer subsidies) work against these incentives.

If we want more economic opportunity, we need to get the government out of the private sector as much as possible.  Let the government focus on what it can do best (protecting people’s rights) while allowing private companies to do what they do best: compete for sales and profits.

This competitive process is what provides new and improved products and increases productivity, allowing people to do more with less effort and resources.

As it stands, the FSOC works against this process in financial markets.  If we don’t roll back the FSOC soon, it won’t be long before it does the same thing with “important” non-financial companies.  That’s not a bright future.


About the Author

Norbert J. Michel, Ph.D. Research Fellow in Financial Regulations
Thomas A. Roe Institute for Economic Policy Studies

Originally published in Forbes. This and more can be found at