By Kevin B. Murray
The Daily Record Newswire
Those who lived through the Cold War probably remember the DEW Line — distant early warning — a system of radar installations in the Arctic region of Canada and along the coast of Alaska.
The purpose was to detect a nuclear attack from the Soviet Union, and provide time for us to respond appropriately.
With the Soviet Union no longer in existence, threats to our economic well-being, rather than nuclear Armageddon, have become the major concern.
Since Washington was unable to see our recent financial meltdown until it was upon us, our government resorted to massive bailouts to keep major companies from bankruptcy and perhaps pulling others and our economy as a whole down with them.
Regulatory agencies are now tasked with monitoring individual parts of our financial system, and no one is responsible for the system as a whole. The recently enacted financial reform bill created the Financial Services Oversight Council, whose purpose is to act as an early warning system for system wide financial market trouble. The FSOC’s purpose is to identify in advance, and take action to correct, system-wide risks of the type that were missed and led to our recent financial problems.
In the 1930s, Congress created a number of regulatory agencies — the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, for example — to end the Great Depression and avoid another one in the future. In the 80 years since the Great Depression, our economy has grown enormously, both in size and in complexity. Today, many individual firms — to be called Tier 1 Financial Holding Companies — are large and highly interconnected with other financial firms. Parts of those firms are regulated by several different agencies, and they have the potential to impact the stability of the financial system as a whole.
The premise behind the FSOC is that the individual government agencies monitoring the individual parts of our financial system, saw the financial systems’ components — the trees — but could miss what was occurring to the financial system as a whole — the financial forest. With no one looking at or being held responsible for the system as a whole, large complex financial firms — AIG, Fannie Mae, Freddy Mac — could become so interconnected with other financial companies that their potential actions or failures could put our entire economy in jeopardy.
The FSOC is to be led by the secretary of the Treasury Department, and made up of high ranking officials from various governmental bodies, including the Federal Reserve board of directors, the FDIC, the SEC and the new Consumer Financial Protection Bureau.
The FSOC will have the power to require information from any financial firm seen as an emerging risk to financial stability; to identify firms that should be under consolidated supervision by the Federal Reserve and to subject those large interconnected firms to stricter standards than those applicable to other companies. When it believes firms’ actions are a grave threat to the stability of the system, the Fed could issue cease and desist orders to require the firm to stop whatever risky activities are being undertaken If that proves insufficient, the FSOC can vote to break up an offending firm, by forcing it to sell or transfer some of its assets.
While some see the FSOC as the “new sheriff” with the power to clean up Dodge City, others see it as yet more big government. Will the FSOC be able to see problems and correct them before they lead to meltdowns? Only time will tell.
Did its predecessor, the DEW Line, save us from a devastating attack from the Soviet Union? While we did not have such an attack, we cannot say with certainty whether the early warning system actually kept an attack from occurring.
Kevin B. Murray is a vice president at Karpus Investment Management. He can be reached at (585) 586-4680.
