I didn’t get a chance to watch much of Treasury Secretary Tim Geithner’s testimony before Congress today (though I saw enough to know he’s looking a lot more confident and assertive these days).  The chatter on CNBC was that  Congress is showing him new found respect and actually asking questions instead of acting prosecutorial. 

But what about his plan for regulating the financial industry.  I’ll leave it to others to parse the details.  (I couldn’t do it if I tried.)  But in the Washington Post’s article about the plan one thing is clear:  The administration has no plans to ensure that financial institutions do not become too big to fail.

The administration sent the first piece of proposed legislation to Congress this morning, which would grant the government the power to seize any large, troubled financial firm.

…Geithner discussed the proposed legislation at the hearing on Capitol Hill this morning, in addition to other steps aimed at limiting the risk that the largest financial firms pose to the economy.

…He said financial products and institutions should be regulated according to their economic function and the risks they pose, not their legal form.

…The agency would regulate the largest financial firms, including hedge funds and insurers not currently subject to federal regulation.

…Geithner called for legislation that would define which financial firms are sufficiently large and important to be subjected to this increased regulation.

You get the drift.  There will be no regulation that limits the size that financial institutions can attain.  I think that’s a mistake, though I’m willing to listen to arguments about why we need to let financial firms become behemoths.

It seems that at least two purposes would be served by limiting size.  One, If a firm fails, its stockholders, investors and employees take the fall, not taxpayers.  That’s the way it works in a capitalist system – or at least it’s supposed to.  Second, limiting size would also likely limit compensation plans.  If you can’t bring in a gazillion dollars in profits, you can’t make a bazillion in bonuses. 

Apparently, preventing companies from becoming too big to fail is not an off the wall idea.

If they are too big to fail, make them smaller.”

Nixon Treasury Secretary George Shultz about Fannie Mae and Freddie Mac

But maybe I’m wrong.  After all, a Repug is the only one I can find to agree with me.

The top Republican on the committee, Rep. Spencer Bachus (R-Ala.), voiced general support for stronger regulatory authority but said that "any new regime for resolving or liquidating non-banks" should not rely on taxpayer funding.

Treasury’s legislative proposal "suggests the administration is considering using taxpayer funding to pay the cost of resolving these failed financial firms," he said. "This to me is unacceptable and would serve only to promote moral hazard and perpetuate a too-big-to-fail doctrine that the American people have squarely rejected."

Or do I have “the American people” behind me?