Be prepared. The tsunami set off by the election of a Republicansenator from Massachusetts to take Ted Kennedy's place is likely togenerate far stronger federal oversight of the insurance industrythan would have otherwise been the case.

It should be clear from the current economic situation thatCongress does a better job talking than governing. The direeconomic straits we are enduring are clear testimony to theinability of Congress to act in a bipartisan, responsiblemanner.

Americans are out of work and deeply in debt, and theywant politicians to come up with jobs, and quickly. At the sametime, they don't want to pay any more taxes, or for the governmentto adopt policies that add to the budget deficit, or impose anymandates–for example, to get health insurance.

The fact that many voters turned their homes upside down to cashin on all the equity contained in them is not relevant. Looking inthe mirror is not an option.

The congressional answer is to shift the blame to the FederalReserve Board as the designated scapegoat and adopt what itdescribes as a "populist" response to the economic crisis.

For example, American International Group is being treated asthe financial equivalent of Three Mile Island. Maurice "Hank"Greenberg, who shaped AIG as a growth stock rather than a dullinsurance company, was a big political player in Washington.Indeed, AIG was one of the biggest contributors to politicalcampaigns when he ran the company, and President George W. Bushknew him personally.

At the moment, Republicans in Congress are trying to sellownership of the AIG debacle to the Fed, which by law was barredfrom regulating AIG.

They are especially aiming at Timothy Geithner, seeking to makehim the fall guy for the Fed's decision to create stability at AIGby paying off its credit default swap contracts in full to itstrading partners.

The problem is that undermining Mr. Geithner will hurt theinsurance industry–at least those in favor of state regulation andagainst federal oversight.

Mr. Geithner has made clear through comments to insuranceofficials and via the House version of the financial servicesreform bill that he supports continued state regulation ofinsurance.

Mr. Geithner's view is that the states should continue toregulate all but the few insurance institutions that pose apotential systemic risk to the financial system.

However, the unspoken decision of President Barack Obama todiminish Mr. Geithner's role in the wake of Scott Brown's victoryin Massachusetts by embracing the tough-love financial servicesreform policies of former Fed Chair Paul Volcker is not good newsfor the insurance industry.

Specifically, in written testimony during a House FinancialServices hearing last September, Mr. Volcker stated specificallythat he urges "consideration of making a national insurance charteravailable to insurance companies willing to accept federalprudential standards."

In answering questions during the hearing, Mr. Volcker addedthat "if AIG had been federally regulated, none of its problemswould have occurred."

That drew a rebuke from Rep. Barney Frank, D-Mass., chair of thecommittee, who said AIG Financial Products, the unit that generatedmost of AIG's problems, was regulated by the federal Office ofThrift Supervision.

In general, through the House version of financial servicesreform, the insurance industry has emerged virtually intact fromfederal regulation. All of its products would escape review fromthe proposed Consumer Financial Protection Agency, and even withthe oversight and resolution of a systemically risky institution,state regulators would continue to play a key role.

The House bill, written under pressure from Republicans andstate regulators, severely limits the Treasury's power throughcreation of a Federal Insurance Office.

The Senate, however, is of a different view. Through comments atpublic hearings and in private meetings with industry officials,Sen. Richard Shelby, R-Ala., the ranking minority member of theSenate Banking Committee, has made clear that he believes strongeroversight of the insurance industry is in order.

It is unclear what form he believes that should take, and thecommittee has not taken up insurance regulation in itsdiscussions.

But in a recent statement inviting the administration to presentits views, as proposed by Mr. Volcker, for stringent regulation offinancial institutions and limiting risk-taking, Sen. Shelby leftsome hints. He said the administration must drop its demand forpermanent authority to undertake taxpayer-funded bailouts.

"Second, the failed regulatory structure that contributed tothis crisis must be changed and the role of Federal Reserve must bereduced," he said.

Wall Street, he added, "needs to know that the taxpayer's walletis no longer open for bailouts, and that the Federal Reserve willno longer be allowed to aid and abet excessive risk taking."

Whatever else that means, it indicates that the insuranceindustry should be prepared for stronger federal oversight.

Arthur D. Postal is NU's WashingtonBureau Chief. You may reach him at [email protected].