To reduce the adminstrative state, President Trump has issued administrative orders to reduce financial regulation.
According to the president, and conservatives generally, credit is not being extended because big, financial interests are over-regulated. If we just roll back Dodd-Frank, they say, we will have more jobs and economic growth.
These executive orders are specifically associated with the effectiveness of FSOC and OLA.
Since people are not paid enough to buy things, due to declining income, they demand credit. Due to the last financial crisis, the extension of credit is now regulated by the Financial Security Oversight Council (FSOC) so that when credit becomes over-extended there is an Orderly Liquidation Authority (OLA). These administrative agencies are in place, by legislative authority, to govern the financial risk referred to as “systemic risk.”
Systemically Influential Financial Institutions (or SIFI’s) are determined by FSOC. “The influence” includes insurance companies as well as TBTF banks because these financial institutions are inexorably linked. They operate together, to game the system, in the form of “actualizing” the risk with derivative financial and insurance products like MBS’s, CDS’s, and CDO’s.
These financial and insurance products are known as “risk-transfer vehicles” (or RTV’s). They do not “intend” to reduce risk (because it cannot “actually” be reduced) but shift it somewhere else — to you!
(It’s “us and them.”)
The effect is to game the system with “innovative,” financial and insurance products “that make markets more liquid.” These products actualize the risk, which is an insurance function, holding financial value in reserve for when the big event actually happens — and like Dodd-Frank says, “it surely will.”
The reason this needs oversight — governance outside itself in the space called “the public interest” — is because risk is deliberately configured to be in a TBTF dimension. This risk proportion (the gamma-risk dimension) is described as being naturally monopolized to “make markets more efficient,” or more liquid, but the last crisis confirmed it to be pure, Objectivist nonsense. (It was not a mistake, but a big fat lie!). Credit was so overextended the system was, in fact, illiquid.
Objectivist bankers and insurance financiers don’t think their interests naturally belong in the public domain. To keep the rate of interest naturally private, risk is banked in reserve. It is a form of “currency” (bank reserve notes) having useful value on demand.
Now that the interest rate is rising, the Fed (a private corporation with the public function of protecting us from the systemic risk) is selling its book of assets, which are really liabilities banked by default.
The game is to not slam us with the risk all at one time. The plan is to quantitatively ease it in, over time, so that the corporate body (the collective) does not “actually” occupy the public space, although it really does by default.
Relying on legitimately natural conditions, we don’t need unnatural administrative authorities to formulate what the risk really is, when it actually just happens on demand (and FSOCs it to you!) by default, do we?
(Griffith E. Lighton Jr. has a Master’s degree in political economy.)