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

It should be clear from the current economic situation that Congress does a better job talking than governing. The dire economic straits we are enduring are clear testimony to the inability of Congress to act in a bipartisan, responsible manner.

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

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

The congressional answer is to shift the blame to the Federal Reserve Board as the designated scapegoat and adopt what it describes as a "populist" response to the economic crisis.

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

At the moment, Republicans in Congress are trying to sell ownership of the AIG debacle to the Fed, which by law was barred from regulating AIG.

They are especially aiming at Timothy Geithner, seeking to make him the fall guy for the Fed's decision to create stability at AIG by paying off its credit default swap contracts in full to its trading partners.

The problem is that undermining Mr. Geithner will hurt the insurance industry–at least those in favor of state regulation and against federal oversight.

Mr. Geithner has made clear through comments to insurance officials and via the House version of the financial services reform bill that he supports continued state regulation of insurance.

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

However, the unspoken decision of President Barack Obama to diminish Mr. Geithner's role in the wake of Scott Brown's victory in Massachusetts by embracing the tough-love financial services reform policies of former Fed Chair Paul Volcker is not good news for the insurance industry.

Specifically, in written testimony during a House Financial Services hearing last September, Mr. Volcker stated specifically that he urges "consideration of making a national insurance charter available to insurance companies willing to accept federal prudential standards."

In answering questions during the hearing, Mr. Volcker added that "if AIG had been federally regulated, none of its problems would have occurred."

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

In general, through the House version of financial services reform, the insurance industry has emerged virtually intact from federal regulation. All of its products would escape review from the proposed Consumer Financial Protection Agency, and even with the 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 and state regulators, severely limits the Treasury's power through creation of a Federal Insurance Office.

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

It is unclear what form he believes that should take, and the committee has not taken up insurance regulation in its discussions.

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

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

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

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

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