The mantra that America heard from guys like Timothy Geithner, Hank Paulson, and Barack Obama that some banks and certain large companies are too big to fail is all wrong.
That is according former SEC Chairman Harvey Pitt, who thinks that the too-big-to-fail notion gives companies an unfair competitive advantage.
“Those firms will almost be guaranteed the ability to get credit and funding anytime they want it. I think that’s a bad fallout factor,” Pitt told Dan Mangru of Moneynews.com in an exclusive interview.
In addition, Pitt said, too big to fail doesn’t recognize the real problem.
“The concept of too big to fail is something of a misnomer”, said Pitt.
“I think what actually is of concern is whether companies or firms are too interrelated to fail. It’s a question of whether the failure of a particular financial institution may bring down with it many others that don’t have the specific problems of the failing firm.”
Pitt also told Mangru that he wants to see fewer government regulatory agencies, more government attention paid to financial early warning signs, and more money in the hands of U.S. consumers.
Financial disasters can be averted using “trip wires” that signal trouble is brewing, thereby making it impossible for companies to act to the detriment of the entire economy.
“I would like to see government have the ability to step in,” Pitt told Moneynews. The government should intervene only when it sees liquidity being adversely affected.
“My view is that the government has to prevent the kind of fallout from failure that will affect innocent citizens, innocent companies, the entire marketplace.”
However, Pitt believes the path to regulatory efficiency lies not in creating more regulatory agencies but in consolidating and combining the ones that already exist to avoid regulatory arbitrage — shopping for the least regulation, a common practice.
Unfortunately, he says, the proposals now on the table will dramatically increase the amount of regulatory bureaucracy.
“People (now) look for the regulator they think will give them the best answer to their particular question,” Pitt observes.
“The result is that we have differing standards, conflicting standards, and great confusion on the part of those who have to comply.”
While he considers a vigorous enforcement program essential, Pitt believes regulators must also educate those they regulate.
And he sees a real need to reconsider how markets are structured.
“The difficulty I have with all of the trillions that have been spent is that the money was spent by giving it to the very companies that produced the crisis,” Pitt says.
“We have seen hundreds of billions if not trillions of dollars given to financial institutions, banks, and yet our credit markets have remained pretty much moribund … because the people who got the money have not used it for the purposes that it was intended to be used.”
Pitt would much prefer that the government give money to consumers, not companies.
Far better, he says, to provide car loans for which the government pays the interest for five years while the buyer pays the principal than to give $40 billion to GM — or dictate the kinds of cars consumers should buy, as the Cash For Clunkers program did.
How does Pitt feel about the direction the SEC is currently taking?
“The country is very lucky to have Mary Schapiro on board,” he says. “I’ve been very impressed with what I’ve seen to date.”
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