Tuesday, April 13, 2010

Mitch McConnell, bank-shrinker?

Ezra Klein has beat me to it again.  Today Mitch McConnell came out against Dodd's bank reform bill,  claiming that by setting up and funding a resolution authority that enables regulators to liquidate the largest financial institutions in an orderly fashion if they become insolvent, it is enabling and in fact guaranteeing future "bailouts." "“This bill not only allows for taxpayer-funded bailouts of Wall Street banks;  it institutionalizes them,” McConnell pronounced.

Klein points out that McDonnell is equating a liquidation that wipes out shareholders and management with a bailout -- and further notes that McDonnell is following to the letter a political strategy laid out by GOP pollster Frank Luntz in February: to equate any Democratic bank reform bill with the hated bailouts of 2008-09.

Cynical indeed. As Klein suggests, if you don't want to give regulators resolution authority over banks currently considered too big too fail, it would seem you would have to be in favor of not allowing banks to grow, or stay, too big to fail.   I would add that the only intellectually consistent, if insane, alternative to  breaking up, shrinking, or reining in today's behemoths or making provisions for their orderly liquidation is to take the position taken by many of the most ignorant and extremist Republicans in fall 2008: let 'em all fail and let the chips fall where they may. Pull down the whole temple of global finance around our ears.

But McConnell is not that crazy. He acknowledged last October that TARP “succeeded in stabilizing the banking system.” It seems fair to assume that he believes that the Federal government can't simply step back and let too-big-to-fail banks enter bankruptcy. That brings us back to Klein's question:  what steps would McConnell favor to make the behemoths smaller, or otherwise enable them to fail without systemic risk?

Would McConnell suggest size limits, such as Simon Johnson and Peter Boone have proposed -- say, assets equivalent to no more than 2% of GDP?  Does he want to restore Glass-Steagall? Or maybe he'd go for the solution proposed by Matthew Richardson and Nouriel Roubini (famous for recommending early that Obama nationalize the weakest of the bailed out banks) in Sunday's Washington Post: charging the largest banks "an insurance premium based on whichever of the institution's debts carry a real or implied government guarantee (akin to the FDIC system already in place), and a fee that reflects the institution's contribution to a potential large-scale, systemic crisis."  In other words, the more risk they take on, the more they pay the Federal government.

The Times' Sewell Chan notes, "The critique by Mr. McConnell, a conservative, is similar in many respects to one advanced by liberal critics of the legislation." Those liberal critics, however, want to shrink the banks or provide them with massive incentives to reduce risk. Somehow I suspect the similarity ends there.

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