EDITORIAL: Uncle Sam's heavy hand

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The Obama administration is on the fast track to socialism with twin announcements from Treasury Secretary Tim Geithner. First he announced this week that he wants to limit the salaries at all banks, all Wall Street firms and possibly other companies. He also wants the power to seize non-bank financial institutions, such as insurance companies and investment firms, that the government will determine are "too big to fail" - whatever that means.

Then, as if that weren't enough, yesterday Geithner called for massive new regulations on the trading of financial assets. In his wanting to blame markets and derivatives, not the government, for increased volatility, he demonstrates that the administration doesn't understand how markets work - speculators make money by reducing price differences, by smoothing out swings in prices. Regulations that prevent or slow innovations to hedge risk mean riskier markets.

All this strikes us as blaming the messenger for the bad news created by the government's regulation. It is a recipe for driving American company headquarters and financial brainpower abroad. This way the former can avoid oppressive regulations and attract the latter by paying higher wages. Welcome to the United States' own brain drain.

There seems no legitimate reason why the government should, as it does, own 80 percent of American International Group (AIG), acquiring it with irresponsible fear-mongering stories, such as airplanes being stranded without AIG insurance. Bankruptcy law works very well, and putting AIG into bankruptcy would have surely allowed those portions of the company that were profitable or could be made profitable to keep operating. AIG lost $10 billion last year in one small portion of the company, the part that traded derivative contracts. But there was and is no reason to believe that there was something inherently wrong with the rest of AIG. Why was the whole company taken over by the government when restructuring could have ensured smooth functioning?

It is hardly shocking to anyone that politicians would let political and not economic decisions guide their actions. Politics has taken center stage the last couple of weeks via emoting over bonuses. The Obama administration's constant bashing of CEOs and capitalism, the circus atmosphere in Connecticut where ACORN has been sponsoring tours of the homes of AIG executives, and the confrontations that have occurred are modern versions of the Place de la Concorde circa 1793-94.

Whether at home or around the world, governments that have bought an ownership stake in companies have seen efficiency go out the window. Studies consistently find that even partial government ownership reduces firm profitability. We once had a national bank in the U.S. - the Bank of the United States - and President Andrew Jackson eliminated it because the bank funded politically connected businesses.

Politically powerful congressmen grant defense contracts to companies that have a lot of workers in their congressional districts. That's bad enough for national defense, but is that the way we want our banks to be run, too? Even before the federal government owned financial institutions, it mucked up banking by mandating loans that companies would not have voluntarily made; there will surely be many fewer protections when the government owns the bank.

Politicians have a hard enough time dealing with the ever-growing public sector and should not add to it by running hundreds of finance companies. There are reasons why shareholders, whose money is at stake, pay executives so much - they know that executives determine the outcomes of their investments and they want these executives to work hard to get them the best results. The notion that regulators will get this right, when their own salaries won't change, no matter how well these regulated firms do, seems absurd.

The former Soviet Union, China and many other nations tried this type of central planning and history weeps at how that turned out. We had hoped that this debate was over decades ago.

For Secretary Geithner and Congress, here is a simple lesson in what speculators do. If speculators think that, say, oil prices are going to rise because a hurricane is about to limit production in the Gulf of Mexico, they start buying oil and raising the price before the hurricane even hits land. They buy oil when it is still relatively plentiful and put it aside for when oil is expected to be scarce. Sure, the price today is higher than otherwise, but the higher price today prevents an even greater spike in prices after the storm. If speculators guess wrong and the storm doesn't do any damage, they lose money. Those speculators go out of business.

Markets have gotten extremely good at smoothing out these prices.

The problems that occur stem from too much government regulation. Piling on more regulation isn't the solution.