Financial services reform consequences may not be unintended

A financial services regulation bill could place many types of businesses under new regulations, even though they are nothing like banks or other companies typically considered to be in the financial services business.

I had thought that this possibility might simply be an example of the unintended consequences of regulation. But after reading a Wall Street Journal article (Will Walmart Pay for the Next Bailout?), I’ve come to believe that these consequences — the spread of regulation to vast new sectors of industry — is, in fact, intended.

Gregory Zerzan, the author, explains: “The current proposals for ‘financial’ reform are stalking horses allowing government intervention into virtually every facet of the U.S. Economy.” He explains that the Federal Reserve — if it believes a company poses a threat to the economy — could order the company to separate its businesses so that its financial dealings could be regulated as a bank holding company.

Which companies could be subjected to this new regulation by the Federal Reserve? Zerzan explains:

Despite non-binding staff explanations to the contrary, there is no mystery as to who is being targeted. Under the bill the Fed gets regulatory authority over bank holding companies with greater than $50 billion in assets, and “nonbank financial companies”. As the Fed already regulates bank holding companies the new twist is that non-banks become subject to Federal Reserve regulation for the first time. The language is unusually clear: if the new systemic risk regulator so chooses, any company engaged in routine business transactions can suddenly be deemed “financial” and subject to bank-like regulation. (emphasis added)

In Wichita, several large companies could be impacted. The author mentions an “airplane manufacturer that holds customer down payments for future delivery” as an example of a company that could now be regulated by the Federal Reserve.

Why is the legislation being considered? Zerzan explains that it’s partly based on the belief by some that the government can manage the economy, but there’s also an opportunity to generate new tax revenue:

Why would the systemic risk regulator seek to make regular American businesses subject to bank-like regulation? No doubt in part it is the belief in some quarters that the government can stop financial crises from happening if only it has enough power and influence over the economy. Even among true believers the near-collapse of the highly regulated banking sector should call that article of faith into question. But there is a more practical reason to seek to turn Walmart, IBM, Boeing and other Fortune 500 companies into “financial” businesses. Under both the House bill and the Dodd legislation it is these companies that are to be taxed to pay for winding up a “too big to fail” firm. If a company gets deemed systemically risky it is on the hook for bailing out financial firms that took on too much risk. Such a regime is neither fair nor sensible from an economic perspective, but existing taxpayers’ money is already over-allocated; the Treasury needs the contents of new wallets to pay for the next crisis.

2 Comments

  • LonnythePlumber -

    It seems like a leap to define non bank financial companies as including aircraft manufactures. It could mean the financing or investing arm or branch of a business that was acting like a bank, but not the prime function. Also your headline reads like legaleze. Maybe you’re reading too many legal documents. HA.

  • Val in Valhalla -

    Perhaps to help clarify it, Lonny, the Wall St Journal article says this regulation allows “government intervention into virtually every facet of the U.S. economy” and to “every large company in America, no matter its primary line of business.” The article is clear: “Every large company,” so Aircraft manufacturers would be included. It wouldn’t really matter what the company does.

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