In their testimony today before the House Committee on Financial Services, both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner made the same point: If the government had had the power in September to do more, it could have saved us all the AIG mess of the past few months.  Bernanke (emphasis mine):

Now we come to a big-picture American Democracy question: Do extraordinary times call for extraordinary measures?  And if so, how do you go back to regular measures during regular times?

The power that Bernanke is endorsing and Geithner is asking for is actually enormous.  It allows the Treasury Secretary to take over non-depository financial institutions: hedge funds, investment firms, insurance giants who've been dabbling in the markets, maybe credit card companies, and possibly major auto companies who have attached financing wings.  He'll have to consult the president and take advice from the Fed board, but at this point, the "independent" Fed is pretty much betrothed to and smitten by the Treasury, so don't expect a big fight there (particularly because without this power, who has the authority to infuse a company with money to save it from bankruptcy?  That's right -- Big Ben).

I am in favor of them having this power at this moment.  In fact, I would've been in favor of someone having this power when AIG went down, during that "extraordinary time."  I feel less confident, though, thinking of this power being available to any Treasury at any time.  I'm also bothered by the idea that it might be necessary in the future, that the possibility of being artfully wound down by the Treasury will prove itself to be such a kind, clean option that the number of companies who are too big to fail will increase in the next few years instead of declining.

By this, I mean that the possibility exists that the government is creating an insurance policy for badly behaving financial institutions -- well, not for the institutions themselves, because I assume a Treasury take-down would be painful, and would at the least involve installation of new management and new priorities and, most likely, since it was a huge focus on the Hill today, strict compensation limits.  No, it seems like this could encourage investment in risky firms by institutionalizing the current bailout scheme.  What I mean is this: if company AIH made a whole bunch of bad deals, and you, as head of J.Q. Morgan, knew it, you'd be less likely to make any deals with them -- unless you knew that the Treasury would never let that company go bankrupt.  It might take it apart, sure, but you'd be protected under that extraordinary scenario.  So why not gamble?

Essentially, I see this authority as setting up an FDIC-like guarantee for non-depository (or what I like to think of as "UnBank Banks") organizations.  And if that's the way it's going to be, there must be rules.

The FDIC has the authority right now to shut down depository institutions.  This is granted through an exchange: banks pay for that protection, through premiums/fees, and also through increased transparency and regulation.  Those three things would be a fantastic overhaul for the financial system, if the Treasury would demand them from the institutions.

I'm in favor of this package of regulations, as I've said before.  But we should have learned by now that expanding powers should also require expanded monitoring and responsibility.  I hope this is what we'll see in the finished plan, when it gets to Congress, or what we'll see in the continuing testimony on Thursday.

Programming note: I'm traveling this week, so there will be a delay in my response -- in fact I'm able to read comments as they come in, but can't log in to reply on the go (no java capability, I guess?).  So bear with me; I'm here, I'm reading, I'll get back to anyone who comments (and catch up on the last two) as soon as I can.