A Stitch in Haste

Without prologue:

–Today’s Treasury press release insists that the direct preferred equity stakes are “a voluntary capital purchase program.” That’s quite the reversal from 24 hours ago, when Paulson insisted that the stakes were, um, “not voluntary.” Apparently the investments are being underwritten by the Bank of Orwell.

–Regarding those preferred stock shares, the President insists:

And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors.

That’s good news, but the details are nowhere to be found. Will there be a call feature built into the shares, and if so, then on what terms? Stated differently, will the banks need the Treasury’s permission to buy back the shares? And if so, then how will that decision be insulated from political influences?

–On a similar note, I was pleasantly surprised to see Barney Frank, of all people, going out of his way on Sunday to point out that the federal government will not have the voting power normally associated with owning common shares. A lifeboat of limited-government hope on the turbulent seas of the New American Socialism™. (But, cf., this old post, and this one.)

–Mission creep comes to the FDIC:

Second, and effective immediately, the FDIC will temporarily guarantee most new debt issued by insured banks. This will address one of the central problems plaguing our financial system — banks have been unable to borrow money, and that has restricted their ability to lend to consumers and businesses. When money flows more freely between banks, it will make it easier for Americans to borrow for cars, and homes, and for small businesses to expand.

Third, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts. These accounts are used primarily by small businesses to cover day-to-day operations. By insuring every dollar in these accounts, we will give small business owners peace of mind and bring stability to the — and bring greater stability to the banking system.

I condemned mission creep as it applies to the Federal Reserve, and I condemn it now with the FDIC. And, as I noted previously, it does not appear that the FDIC will be charging participating banks higher premiums in exchange for these additional services. Not only is that an ideological aberration (do they come to save financial capitalism or to kill it?), it also will expose taxpayers to even more risk if — when? — the FDIC needs its own bailout.

Previously:
–The Federal Reserve — Statement of Principles
–FDIC for Dummies (and Politicians)
–The Bailout, the President and the Fallacy of Intrinsic Value

Filed under: Activist Legislators & Nanny Statists, Economics & Finance