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Factsheet #57 on Regulation and Economy

April 1, 2010

TARP II: Breeding More Bailouts

Regulatory Redux

  • Not Fixing the Problem: Congress and the Obama Administration are proposing new regulations that they claim will fix the financial industry. In reality, these regulations would hurt consumers and make future government bailouts more likely. They would also do little to address the real problems in the financial industry.
  • "Too Big To Fail" : Some propose giving the Federal Reserve or other regulators sweeping powers to control firms deemed "too big to fail"--firms whose failure could put the financial system at risk.
  • False Security : This puts a lot of faith in regulators who missed the outset of the last financial crisis.
  • The Real Life Effect? More risk. The government's new powers would signal to markets that the targeted firms are guaranteed against failure, thus leading those firms to take more undue risks, not fewer.

TARP IIGovernment Intervention Is Not the Answer

  • New Regulatory Bureaucracy : The bill would create a new "Consumer Financial Protection Agency." Despite its name, this new bureaucracy would hurt consumers far more than it would help them.
  • Limiting Financial Innovation : The new powers granted would likely be used to limit the development of new products, thus depriving consumers of the real benefits of financial innovation.
  • Increased Risk: The new rules would do nothing to reduce the risk of another financial crisis and in fact could increase risk by interfering with safety and soundness rules.

A Permanent TARP

  • Broad Federal Powers: The proposals would give the FDIC or another agency broad power to seize and close failing financial institutions (with limited court review) and establish a permanent fund to resolve the affairs of the firms it takes over.
  • Uncertainty: Private businesses would be subject to closure at the sole discretion of bureaucrats in Washington based on vague standards.
  • The Final Irony: These regulations would pave the way for more bailouts rather than preventing new ones.

There Is An Alternative

  • Modernize Bankruptcy Laws : One reason for the TARP bailouts was that current bankruptcy laws are not designed for modern financial firms. Congress should create an expedited bankruptcy process to restructure and close large and complex financial firms. Otherwise, the next time firms face financial troubles, the government will again be pressured to bail them out.
  • Strengthen Capital Standards: Policymakers should strengthen capital standards to reduce the risk that financial firms will reach the point that their failure could endanger the entire financial system.

For more information, please visit: www.heritage.org.

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