JONATHAN COHN APRIL 27, 2011
-
Read Later
READ LATERAvailable only to subscribers. SUBSCRIBE TODAY
-
Listen
ARTICLE AUDIO
- Font Size
Discussion of the House Republican budget has focused mostly on the privatization of Medicare, the block-granting of Medicaid, and the repeal of the Affordable Care Act. And that’s appropriate, given the magnitude of the changes and widespread impact they would have. But those proposals are obscuring some other proposed shifts that, in any other context, would be plenty troubling for their own sake. This week I'll highlight five of them. On Monday, I talked about radical changes to the Supplemental Nutritional Assistance Program (SNAP). On Tuesday, I talked about raising the eligibility for Medicare. Today I look at the weakening of financial reform.
For the most part, we can measure the impact of the House Republican budget by thinking about the dollars not spent--i.e., the hundreds of billions of dollars that Paul Ryan and his allies would take away from Medicare, food stamps, and other vital programs. But some of the budget’s provisions have less to do with spending levels and more to do with regulatory authority.
The most obvious and important of these is a proposal to eliminate a key feature of the Dodd-Frank financial reform bill and, in the process, weaken the government’s ability to prevent another financial crisis.
The Dodd-Frank law gives the government authority to subject certain large, complex financial institutions to additional regulation, on the theory that their collapse could have such profound effects on the rest of the econmy. In addition, the Dodd-Frank law puts in place a legal process that would allow the Federal Deposit Insurance Corporation, or FDIC, to place failing financial firms into receivership and put them through an orderly break-up when normal bankruptcy procedures won’t work. It’s the same sort of authority FDIC has long held for taking over and then dissolving failing banks.
From the very beginning of the debate, Republicans have attacked this proposal. And while their arguments aligned almost perfectly with those of the financial industry, the Republicans insisted they were merely looking out for the taxpayers. Dodd-Frank, Republicans said, would give Washington “permanent bailout authority” and create a “perpetual taxpayer bailout of Wall Street.”
The phrases seemed to be lifted straight from a Frank Luntz public opinion memo and, like so many Luntz slogans, represented more or less the opposite of the truth. A major difficulty during the financial crisis was the government’s inability to manage the dissolution of large financial firms in an orderly way. When the big investment houses were on the verge of collapse, the feds really had just two choices: Take over the firms altogether, putting taxpayer dollars on the line, or let them go under. Lehman Brothers got the latter treatment and, well, we all know how that story turned out. Credit markets froze, the economy came to a standstill, and lawmakers decided they couldn't afford to let another big firm collapse.
You needn’t take my word for this. Earlier this week, the FDIC released a report on how it might have handled the Lehman crisis if, at the time, it’d possessed the sort of authority the Dodd-Frank law now gives it. The report predicted that FDIC could have managed the sale of Lehman to another firm, Barclays, and obtained a better deal for both taxpayers and investors. "While there remains no doubt that the orderly liquidation of Lehman would have been incredibly complex and difficult," FDIC said, "it would have been vastly superior for creditors and systemic stability in all respects."
FDIC Chairman Sheila Blair was a staunch, vocal advocate for giving her agency these new powers, so perhaps you'd expect FDIC to say such things. But Blair is no radical. As the Roosevelt Institute's Mike Konczal notes, she used to be counsel to Bob Dole, the former senator and Republican presidential nominee. Nor is Blair's view an isolated one. Henry Paulson, who was Bush's Secretary of the Treasury during the Lehman crisis, told Aaron Ross Sorkin of the New York Times that "We would have loved to have something like this for Lehman Brothers. There’s no doubt about it."
To be clear, even supporters of Dodd-Frank concede this new resolution authority probably wouldn't work on the very biggest institutions, like Citibank or J.P. Morgan. In those instances, the government would face the same, unappealing choice between collapse and bailout. That's one reason my (much better informed) colleague Noam Scheiber, among others, argued so strenuously for even stronger regulation.
But Dodd-Frank is at least a step in the right direction. Take it away, as the Republican budget would, and costly bailouts become more likely, not less. In that sense, I guess, this really is about government spending after all.
For more on this subject, see Pat Garofalo and David Min, as well as Konczal and, of course, Noam. All of them have followed, and written on, this issue far more closely than I have.
6 comments
**. . . would give Washington “permanent bailout authority” and create a “perpetual taxpayer bailout of Wall Street.” The phrases seemed to be lifted straight from a Frank Luntz public opinion memo and, like so many Luntz slogans, represented more or less the opposite of the truth. ** This is a baffling phenomenon, and it has grown more pervasive & widely accepted the last couple years. "[M]ore or less the opposite of the truth" is a tricky description, though; I'd say it's more like, a Democrat will say, "Hey, man wanna come over tomorrow & watch the Lakers game?" And a Republican will respond, "Nah, I don't like Pujols." How does a reasonable person argue with that? Or a Dem will say, "Hey, try some of this chicken noodle soup. Good, huh?" And a Republican will respond, "Nah, it needs more sugar." Again, it makes no sense. It all makes no sense, but I can't quite accuse them of out & out lying, and I hate to call roughly half my fellow Americans intellectually bankrupt imbeciles by remaining focused on this source of frustration. I wish wonkish, well considered articles like this one (and its many substantiating links) were enough to make the solutions clear and advance the discussion, but how does one overcome the power of idiotic, strangely powerful talking points?
- Konstantin
April 27, 2011 at 1:25am
Sorry JC, this one is a stretch. How did Lehman turn out? Yes the lawyers have made a ton, but the recoveries are heading toward standard default recovery. Much higher than the 8.5 cents the CDS settled at. More authority always seems better, but the authority that existed did not even see the problem coming, and ignored - reasonably it seemed at the time - the warnings of the short sellers that did. Better to require more margin, and depth in either equity or debt to absorb losses away from taxpayers. Too big to fail is a problem because we allow it. All-knowing regulators either don't exist or come with an immense and unseen cost. Risk should be clearly defined and on the shoulders of those wiling to bear it. Your faith in regulators is in my view naive, convenient, and dangerous. Make risk takers absorb risk, and you don't need to-big-to-fail.
- ds111
April 27, 2011 at 1:34am
Sorry JC, this one is a stretch. How did Lehman turn out? Yes the lawyers have made a ton, but the recoveries are heading toward standard default recovery. Much higher than the 8.5 cents the CDS settled at. More authority always seems better, but the authority that existed did not even see the problem coming, and ignored - reasonably it seemed at the time - the warnings of the short sellers that did. Better to require more margin, and depth in either equity or debt to absorb losses away from taxpayers. Too big to fail is a problem because we allow it. All-knowing regulators either don't exist or come with an immense and unseen cost. Risk should be clearly defined and on the shoulders of those wiling to bear it. Your faith in regulators is in my view naive, convenient, and dangerous. Make risk takers absorb risk, and you don't need to-big-to-fail.
- ds111
April 27, 2011 at 1:41am
The debate was between bail-out or government take-over. I recall that Scheiber favored the latter. I opposed take-over because I couldn't figure out what the government would do the day after. But once it became clear that bail-out was the antibiotic for reform, I came around (when, of course, the choice had already been made). My recollection is that Scheiber later changed his mind and supported the bail-out, but memory, mine at least, is unreliable. [What I do know from personal experience during the financial crisis has caused me to loathe banks. My bank, a very large one, adopted a five day hold on check deposits (which is actually six days because the first day doesn't count). For somebody in my business, that creates a cash flow headache. Of course, it doesn't take six days for a check to clear (the policy even applied to checks drawn on the same bank!), but it provides the bank with lots of free cash during the float. It was just one of many new policies banks adopted, using the financial crisis as an excuse.] What's clear from the experience is that (1) banks will not change their behavior in the absence of very firm regulation, and (2) government take-over is an option that will never be exercised. In other words, we have but one choice.
- rayward
April 27, 2011 at 8:13am
All of the Republicans’ actions and proposals show quite clearly that they have no real interest in lowering the deficit or preventing another economic crisis. All their energies are devoted to doing the bidding of their wealthy and corporate masters, and those people just want more, more, more. If the GOP were to get its way on things, the middle class would be crushed and there would be further Wall Street meltdowns. Corporate execs and the rich and their lapdogs in Congress figure that no matter what happens, they’ll be fine. And that’s all that matters to them. To hell with the country as a whole. CNN reports that there was a near riot at a town hall meeting on the Ryan plan in Orlando, Florida, on Tuesday. It was mainly older white people protesting cuts to Medicare, but lets hope people start hating the entire plan. There’s certainly a lot to hate—including more tax cuts for the rich—and maybe spin and lies won’t work this time around. It’s time for a great awakening across the land. Even Tea Partiers ought to angry about a plan that makes further Wall Street bailouts likely. Bailouts have been one of the main issues fueling their rage, but of course they have turned that rage toward Obama and the Democrats. Perhaps some of them will come to their senses and see who their real enemies are.
- DAVIDDREIER@EARTHLINK.NET-old
April 27, 2011 at 9:07am
Dream on, DaveyD. Getting angry people to admit they were wrong about the direction of their anger is rather like trying to ski through a revolving door.
- cspencef
April 27, 2011 at 10:39am