Why are Republicans opposed to resolution authority for large banks? Do they want to force another uncontrolled bailout the next time a crisis hits?:
The Fire Next
Time, by Paul Krugman, Commentary, NY Times: On Tuesday, Mitch McConnell,
the Senate minority leader, called for the abolition of municipal fire
Firefighters, he declared, “won’t solve the problems that led to recent fires.
They will make them worse.” The existence of fire departments, he went on, “not
only allows for taxpayer-funded bailouts of burning buildings; it
institutionalizes them.” He concluded, “The way to solve this problem is to let
the people who make the mistakes that lead to fires pay for them. We won’t solve
this problem until the biggest buildings are allowed to burn.”
O.K., I fibbed a bit. Mr. McConnell said almost everything I attributed to him,
but he was talking about financial reform, not fire reform. ... But it amounts
to the same thing.
Now, Mr. McConnell surely isn’t sincere; while pretending to oppose bank
bailouts, he’s actually doing the bankers’ bidding. But before I get to that,
let’s talk about why he’s wrong on substance.
In his speech, Mr. McConnell seemed to be saying that in the future, the U.S.
government should just let banks fail. We “must put an end to taxpayer funded
bailouts for Wall Street banks.” What’s wrong with that?
The answer is that letting banks fail ... is a bad idea for the same reason that
it’s a bad idea to stand aside while an urban office building burns..., the
damage has a tendency to spread. In 1930, U.S. officials stood aside as banks
failed; the result was the Great Depression. In 2008, they stood aside as Lehman
Brothers imploded; within days, credit markets had frozen and we were staring
into the economic abyss. ...
Since the 1930s, we’ve had a standard procedure for dealing with failing banks:
the Federal Deposit Insurance Corporation has the right to seize a bank that’s
on the brink, protecting its depositors while cleaning out the stockholders. In
the crisis of 2008, however, it became clear that this procedure wasn’t up to
dealing with complex ... institutions like Lehman or Citigroup.
So proposed reform legislation gives regulators “resolution authority,”... the
ability to deal with the likes of Lehman in much the same way that the F.D.I.C.
deals with conventional banks. Who could object to that?
Well, Mr. McConnell is trying. ... It’s a truly shameless performance: Mr.
McConnell is pretending to stand up for taxpayers against Wall Street while in
fact doing just the opposite. In recent weeks, he and other Republican leaders
have held meetings with Wall Street executives and lobbyists ... to coordinate
their political strategy.
And let me assure you, Wall Street isn’t lobbying to prevent future bank
bailouts. .... By depriving regulators of the tools they need to seize failing
financial firms, financial lobbyists increase the chances that when the next
crisis strikes, taxpayers will end up paying a ransom to stockholders and
executives as the price of avoiding collapse.
Even more important, however, the financial industry wants to avoid serious
regulation... It’s worth remembering that between the 1930s and the 1980s, there
weren’t any really big financial bailouts because strong regulation kept most
banks out of trouble. It was only with Reagan-era deregulation that big bank
disasters re-emerged. ...
To understand what’s really at stake right now, watch the looming fight over
derivatives, the complex financial instruments Warren Buffett famously described
as “financial weapons of mass destruction.” The Obama administration wants
tighter regulation of derivatives, while Republicans are opposed. And that tells
you everything you need to know.
So don’t be fooled. When Mitch McConnell denounces big bank bailouts, what he’s
really trying to do is give the bankers everything they want.
Posted by Mark Thoma on Friday, April 16, 2010 at 12:42 AM in Economics, Financial System, Politics, Regulation |