David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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President Obama’s plan to restructure regulation of America’s financial system has some desirable elements. It also has great danger.

Eliminating certain banks that were exempted from supervision is appropriate. So is the elimination of the Office of Thrift Supervision (OTS) one of the regulators of AIG. Is there really a difference between a thrift charter and a commercial bank in the modern system? The answer is no.

The grave risk in the plan is that it politicizes the Federal Reserve and, in certain instances, gives the Treasury a veto over Fed activity. This is particularly true for the implementing of the emergency powers that the Fed has used during the crisis. The Fed will have to obtain the Treasury Secretary’s written permission before an emergency action occurs. Do we really want to have an appointed cabinet officer in our government wield that power over our so-called independent central bank?

Remember, it is the central bank that is charged with policy making to encourage low inflation and economic growth. The more politics gets into central banking, the greater the inflation risk. Politicians do not want to apply restraint. They tend to discourage higher interest rates as a tool to fight inflation. History is replete with examples of central bank policy failures while under political influence.

Power over the “review” of the Fed’s structure is also given to Treasury, even as the Fed is charged with drafting a report. Many Fed watchers expect this to be the basis for an attack on the regional Fed bank system. The suspected target is to shrink the number of regional banks and also reconstitute the structure of the Fed’s decision making.

Right now the Federal Open Market Committee sets monetary policy. It is composed of seven governors (when all seats are filled) and the presidents of the twelve regional Fed banks. We expect the Congress to change that and, perhaps, reduce the number of regional banks to five. The survivor banks may have changed roles and even house some of the supervisors under the Fed’s expanded role.

Once this Obama proposal becomes an introduced, proposed law, the Federal Reserve Act will be reopened for amendment and anything can happen. That is when the lid on Pandora’s Box will have been lifted.

In the House, the Obama administration has the certain votes to pass a comprehensive revised Federal Reserve Act. Several key committees will be involved, with Barney Frank’s Financial Services in the forefront. If the pattern of other legislation is followed, the Pelosi-led House will send the final law to its rules committee, which will vote out a limited-debate, no-amendments structure. Republicans are emasculated in the House, so the most they can do is bluster for the TV cameras. House passage is nearly a certainty.

In the Senate there is still room for material change to this proposal, and the debate there is destined to be fierce. We expect that the Senate version will be markedly different from the House’s. The rules will require that the differences be hashed out by a House-Senate conference committee. Then that final proposed law will head back to the House and Senate for straight up or down votes, with no amendments permitted in either chamber. It will pass.

This Obama proposal is on a fast track. There will be public hearings, of course, but the decisions are being made in the smoke-filled rooms. The lobbying is already intense. We believe that the end result is coming and it is already known. The United States is extending a social-democratic form of government to the bulk of the US economy. We are applying an “industrial policy” to finance and banking, just as we are doing to health care and autos.

We have already done this for years with the agriculture sector. The result is that we pay farmers not to farm and we get ethanol policies that starve millions of people, and we promote protectionism in sectors like sugar. That’s how industrial policies end up in social democracies. We are going to get one in banking and lending and the monetary business. The outlook is not sanguine.

We will have more to say about the concept of industrial policy as a form of economic policy. For now we are going to get some rest, having read through this 89-page white paper twice. Many of its highlights will be seen in newsprint and on TV and heard on radio. We see no need to be redundant.

As for the phrase “industrial policy,” we will leave readers to contemplate its meaning, because it will affect every one of us. One of several definitions from a Google search of economic references is: “An industrial policy is a set of actions executed by interventionist or mixed-economy countries in order to affect the way in which factors of production are being distributed across national industries. By this definition, it’s logical that industrial policies contain common elements with other types of interventionist practices, such as trade policy and fiscal policy.”

Welcome to the new America. Add up finance and banking, agriculture, autos, housing, and health care: you get nearly half the nation’s GDP under an industrial policy. Larry Kudlow, take note: “free-market capitalism” is dead.

~~~

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com
800-257-7013
June 18, 2009

http://www.cumber.com

Category: Bailouts, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “Obama’s Financial Regulatory Restructuring is an “Industrial Policy””

  1. The one caveat I would add is that for years, we did not have an industrial policy, with a very close working relationship between these firms and the deregulators.

    The net result was that the companies blew themselves up.

    Guess what happens when you are given a wide degree of latitude in personal or corporate behaviors, and you abuse that trust? It gets taken away.

    These companies have proven that they are incapable of self-governance and/or self regulation.

    Taxpayers have the right to say NEVER AGAIN WILL YOU COST US TRILLIONS OF DOLLARS IN BAILOUTS.

  2. “History is replete with examples of central bank policy failures while under political control.”–above.

    That is an Olympic caliber display of Mental Gymnastics.

    Maybe, to safely dismount, you could tighten that some: “History is replete with examples of Central Bank failures. They, being the Ultimate expression of Political Control of the Economy, have no other Option.”

  3. bruerr says:

    David Kotok, I have some narrow questions: Does eliminating the Office of Thrift Supervision (OTS), negate 12 USC 1831 o Prompt Corrective Action (http://www.law.cornell.edu/uscode/uscode12/usc_sec_12_00001831—o000-.html)? By extension, is the Office of Thrift Supervision (OTS) and law referenced above, unrelated?

    Do you believe from review of the “new” plan, that the administration, treasury or federal reserve entity, are trying to sidestep important laws, contained in 12 USC 1831 o

  4. Halp says:

    What I want to see is some serious grilling of the Geithner and his boss by Congress. How can anyone think that granting such broad unchecked powers to the FED is going to benefit the country in the long term? It’s anti-American if you ask me. I’m sick of these “smoke-filled” back room dealings pushing government agendas upon companies.

    Plus you have the Health Care issue the administration is pushing so much so that they’ve enlisted the ABC NEWS arm to be their propaganda machine. It’s like they’re trying to choke us with huge sweeping political agendas that aim to eliminate the freedom in business.

    Add to the mix what Russia and China are attempting to do by leading other countries away from the dollar and I think we are in for a financial storm in this country. I keep watching the price of gold and silver and I am not surprised to see them both remaining steady in comparison to the dollar which is like the walking dead at this point.

  5. Moss says:

    Free market capitalism was never alive.

    Free market manipulation of capitalism perhaps.

  6. alfred e says:

    The wheels are coming off. In front of the MSM. God help us all.

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