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What's the Republican alternative to bailouts?

"If there’s one thing Americans agree on when it comes to financial reform, it’s this," said Senate Minority Leader Mitch McConnell. "Never again should taxpayers be expected to bail out Wall Street from its own mistakes. We cannot allow endless taxpayer-funded bailouts for big Wall Street banks. And that’s why we must not pass the financial reform bill that’s about to hit the floor."

So much for that vaunted bipartisan cooperation, huh?

The Republican attack on FinReg is that it creates a "permanent bailout." This isn't a judgment on the Dodd bill. In fact, it long predates the Dodd bill. It goes back to a memo that GOP pollster Frank Luntz penned back in February. The subject? How to defeat financial regulation reform. "If there is one thing we can all agree on," Luntz said, "it's that the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated." Note the echo in McConnell's remarks above. "Frankly," Luntz concluded, "the single best way to kill any legislation is to link it to the Big Bank Bailout."

So that's what McConnell does. But is it true? When compared to the status quo, absolutely not. The Dodd bill makes bailouts less likely by empowering regulators and increasing transparency, raises a $50 billion fund from banks to pay for future too-big-to-fail bankruptcies, and then makes the outcome a predictable punishment rather than a chaotic rescue. That last is known as "resolution authority" -- as bloodless a word as one could possibly imagine -- and it wipes out both shareholders and management. It's all there in Section 206 of the bill: "Mandatory Terms and Conditions for All Orderly Liquidation Actions." What we call "resolution" would better be described as "execution."

But there's a good argument to be made that this bill doesn't go far enough. On some level, so long as we have systemically important firms, there will be the risk of bailouts. Management and shareholders might not win out, but many creditors will do better than they should, and so too will some firms. Criticizing the Dodd bill for not entirely ending the problem of systemically-crucial firms -- and thus rescues of some form or another -- is a fair critique.

The ways to permanently end bailouts, however, are very radical: The most common suggestion is to break up large firms before they become too big to fail. Another option, put forward by Gary Gorton, is to insure the securities that banks lend to one another. Another option is to impose such enormous capital requirements on systemically important banks that they can't take many risks and can mostly cover their debts.

The way to judge whether someone is serious about ending bailouts is to see whether they propose one of these options, or some similarly radical solution. McConnell has not done that yet, and he does not do it in this speech. But the status quo, of course, is far more pro-bailout than the Dodd bill is. If that's McConnell's alternative, than he is ensuring and fighting for a future of endless bailouts. And if it's not his alternative, he needs to say what his alternative is.

By Ezra Klein  |  April 13, 2010; 2:10 PM ET
Categories:  Financial Regulation  
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Comments

One again the GOP plays politics with an issue instead of trying to fix a dire problem.

Another reason I am no longer a Republican.

Posted by: Lomillialor | April 13, 2010 2:17 PM | Report abuse

I'm guessing McConnell's solution is more deregulation of financial firms and tax cuts for people like Paris Hilton.

Posted by: nisleib | April 13, 2010 2:18 PM | Report abuse

Did anyone really expect anything else from him?

His one brilliant strategy was "just say no". Not to offer alternatives, not to work with the other party, not to bring up substantive arguments against the bills in consideration. Just to join hands, and say "no" to anything coming out of this Congress.

What I truly do wonder is, are people buying this?

Republicans created a reputation for themselves as the "pro-business" party, and are holding meetings with Wall Street executives, to let them know they are on their side, and ask for donations.

http://yglesias.thinkprogress.org/archives/2010/04/mcconnell-cornyn-pitch-gop-as-banksters-best-friend.php

Can they realistically now try to pivot into the "populist anti-Wall Street" party?

I sort of have my doubts as to whether Republicans can really pull this one off.

Posted by: JERiv | April 13, 2010 2:23 PM | Report abuse

The Republicans are an wretched bunch of do nothing whiners - including their supporters who now hide away and ashamedly call themselves 'Libertarians' or 'Conservatives' or 'Tea Party' ... it's just whine - whine - whine ! Then when the opportunity comes to place needed regulation on the banks and institutions that caused the meltdown - suddenly you're nowhere to be found ! Pathetic lot.

Posted by: PulSamsara | April 13, 2010 2:34 PM | Report abuse

"McConnell has not done that yet, and he does not do it in this speech. But the status quo, of course, is far more pro-bailout than the Dodd bill is. If that's McConnell's alternative, than he is ensuring and fighting for a future of endless bailouts. And if it's not his alternative, he needs to say what his alternative is."

Why would he bother? There are no negative repercussions to failing to provide an alternative. The GOP hasn't suffered at all for their total lack of ideas on health care reform, and I don't suspect they'll get any more pressure on that front this time around. The goal is to muddy the waters. Get people asking what's wrong with the Dem plan, never mind the mess we're already in.

Posted by: ozacrot | April 13, 2010 2:39 PM | Report abuse

"We cannot allow endless taxpayer-funded bailouts"

If there is only bank money in this fund, how the heck is it a bailout? If you're making banks use their own money instead of our money, how is that a taxpayer-funded bailout?

Isn't this just the last line of defense? We put in a whole bunch of rules to make it harder for banks to screw up like they did in 2008. And the last line of defense is that if they screw up, they use their own damn money to fix their mess instead of our money!

What am I missing here?

Posted by: theorajones1 | April 13, 2010 2:39 PM | Report abuse

One seemingly practical solution is to "break up large firms before they become too big to fail." The odd part is that the currently prevailing majority party opposes doing so, not only in the financial sector but in other areas as well.

My concern is that extremist bickering might (once again) silence the wise but moderate voices on both sides. As an example not directly involving FinReg but involving similar (perhaps more easily understood) concepts, consider the testimony of the American Library Association as it discussed centralization of literary resources before a House committee last year. The reactions from committee members offers surprising insight into party-line ideologies regarding centralization and the building of monopolies.

Posted by: rmgregory | April 13, 2010 2:40 PM | Report abuse

I think the implied alternative is a fire brand and populist, "let them FAIL!". However unserious this is from an economic perspective, I'm not convinced most people understand that is a very dangerous position to take in these types of crises.

Posted by: Dan_B | April 13, 2010 2:44 PM | Report abuse

Dan_B but in many cases we did "let them fail" Lehman Bros, Bear Stearns, Merrill Lynch, Countrywide, Wa Mu all failed. The politically favored banks were bailed out, and continue to harm us. Our policies created bigger banks through the absorption of the failed entities.

The biggest net bailouts of all went to the GSEs- the great holes where taxpayer money is still being poured- and they are never going to pay us back.

The purpose of the government is not to run the economy.

Posted by: staticvars | April 13, 2010 2:59 PM | Report abuse

along these lines

http://thescrambler.tumblr.com/post/518773948/lunchtime-thought-experiment-american-banksters

Posted by: cardinalchris08 | April 13, 2010 3:01 PM | Report abuse

McConnell's statement is nonsense on a policy level; it only works as a political statement.

e.g. You can't resolve the issue of "too big to fail" by preserving the status quo. McConnell doesn't say he's in favor of the status quo, but effectively that's what near-uniform obstruction is likely to achieve.

McConnell's end game is: What position will raise the most money for the NRSC in the near term?

What position will be the most likely to guarantee a favorable political outcome in November?

His position is not: "What financial structure will limit the collateral damage in the event of a future collapse and protect taxpayer interests and the broader economy?"

For a purely political creature like McConnell, the policy implications are not his concern.

The GOP will try to have it both ways. The NRSC solicits campaign contribs from Wall Street while simultaneously blaming the Dems for doing Wall Street's bidding. It's the same old shell game.

The tragedy is that the near-uniform GOP obstruction and the decision to simply play politics with this issue, almost guarantees that the Dem measures will leave the status quo more or less intact.

Posted by: JPRS | April 13, 2010 3:04 PM | Report abuse

I'm prone to agree with staticvars. "Too big to fail" is a myth created by fat cat bankers and their good friends at the Treasury Department. They are only "too big to fail" in the sense that certain bankers and their Washington friends want to continue to enjoy important jobs and a high-living lifestyle and not have to bear the consequences of their bad behaviors.

The bailouts are a tax-payer funded method of letting bad actors to continue to act badly. One of the reasons FinReg is necessary (coincidence? I think not) is that of course you're going to have to have rigorous regulation if you, as a matter of public policy, take tax payer money to prevent poorly (and often fraudulently) managed banks from suffering the consequences of their bad decisions. If you're going to insulate irresponsible banks and their top brass from market realities, then, yes, heavy regulation is all you have left.

Better yet, how about some common sense regulation and then we left failing banks fail? What is supposed to be "too big to fail", anyway? Investor money in the bank? Financial instruments administered by the bank? Account holder money? Such things can be insured or covered for the good of the economy without throwing billions in tax payer money at enabling dysfunctional financiers in maintaining their reality-detached lifestyles, just because Timothy Geithner or Paul Bernanke live in the same top-shelf neighborhoods.

Posted by: Kevin_Willis | April 13, 2010 3:12 PM | Report abuse

Kevin - I think the reason these banks are considered "too big to fail" is that if they fail they will cause the entire economy to fail. The math is such that it would be MORE expensive to let these banks fail that it would be to bail them out.

There is some historical precedent to this concept.

And we had regulations, such as Glass-Stegall, meant to prevent banks from becoming "too big to fail" but several decades of Republicans pushing deregulation did away with those regulations.

Posted by: nisleib | April 13, 2010 3:27 PM | Report abuse

"Better yet, how about some common sense regulation and then we left failing banks fail? "

Which is exactly what this legislation is intended to do. Use the example of a big bank, like WaMu. It "failed"...what's the big deal, right?

The big deal is there is a regulatory structure that exists today to takeover and liquidate standard banks (like WaMu) while protecting the savings of individuals and giving investors a haircut. It's called the FDIC. Banks don't "fail" anymore in the classic pre-1930s sense.

We need a similar structure to handle the "shadow banking" industry, ideally funded with their own money (like the FDIC). This way, the government can takeover and liquidate a failing institution in a rational and controlled way.

Anybody who thinks letting institutions go bankrupt (e.g. Lehman Bros.) is a good idea is missing the point. McConnell doen't really believe this either (he voted for the bailout), but doesn't have a bone of integrity in his body, so what does he care?

Posted by: dailykos2 | April 13, 2010 3:35 PM | Report abuse

Seems like the Republican alternative to bailouts is patterned on the Massey Energy approach to mine safety at the Big Branch Mine.

Posted by: cheesemonkey | April 13, 2010 3:38 PM | Report abuse

Kevin : "Better yet, how about some common sense regulation and then we left failing banks fail?"

Because without a proper regulatory framework in which banks can exist in a healthy manner, all banks will fail (all except USAA maybe) due to greed.

We need to fix that framework so that too big to fail is only a theory.

Krugman explains why too big to failure is a failure and why the problem is not limited to big banks....

http://krugman.blogs.nytimes.com/2010/04/12/failure-is-a-failed-strategy/

Posted by: Lomillialor | April 13, 2010 4:03 PM | Report abuse

Fascinating -- he's shooting a campaign ad -- hence all the repetitions of tag lines.

Posted by: bdballard | April 13, 2010 4:49 PM | Report abuse

"But the status quo, of course, is far more pro-bailout than the Dodd bill is."

Excellent point. And yes, the fact that McConnell voted for the bailout says everything. Thoroughly unprincipled.

Posted by: slag | April 13, 2010 5:12 PM | Report abuse

Lomillalor,

its a far stretch to say that all banks are prone to fail. Platitudes like that always fall on their face. I also find it difficult after reading you for months that you have EVER voted Republican.


I agree that they should have been left to fail but first they should not be allowed to get as large as they are within the same industries. Health insurers should not be allowed to merge further than they already are as they have shown they can't negotiate sufficiently against providers. Banks should likewise not be able to merge past a certain point and regulators should simply have the stones to say no. But as Kevin said all the crash did was have the government find a buyer and make their buddies rich at our expense. how again is Geithner doing that Republicans fault again?

Posted by: visionbrkr | April 13, 2010 5:17 PM | Report abuse

"But as Kevin said all the crash did was have the government find a buyer and make their buddies rich at our expense. how again is Geithner doing that Republicans fault again?"

Honestly. Why do you bother to spout this nonsense? Why? I mean, do you even take yourself seriously?

On second thought. Why do I even subject myself to this nonsense? Why? I mean, there's got to be some glue around here I could sniff instead.

Posted by: slag | April 13, 2010 5:37 PM | Report abuse

@nisleib: "but several decades of Republicans pushing deregulation did away with those regulations"

Well, Regulation Q (a component of Glass-Steagall) was repealing in 1980, pre-Reagan, under Jimmy Carter and a a Democrat congress. Maybe not a bad idea, and I'm not sure who sponsored it, but I'm guessing it wasn't just Republicans. The part that led to the S&L crisis was repealed by a bill sponsored by a Democrat and a Republican, and had broad support in congress (including Steny Hoyer and Charles Schumer). It passed by 272-91 in the house, in 1982, when the house enjoyed a significant Democrat majority.

The final repeal was all Republican in sponsorship, in the vote in the senate, and bi-partisan in the house vote.

And while Democrats are all about the new FinReg, something that arguably was working--i.e., Glass-Steagall--they aren't exactly pushing. I've even heard it be dismissed as irrelevant, and as if it would have been a negative in the housing crash. So, I dunno. Maybe it's all Republicans twirling their sinister mustaches, but I'm not feeling it.

Posted by: Kevin_Willis | April 13, 2010 5:52 PM | Report abuse

slag,

so when did you become a shill for Goldman Sachs?

http://www.huffingtonpost.com/2010/01/26/goldman-sachs-approached_n_437041.html

These idiots couldn't have negotiated a better deal for the taxpayer?

Oh that's right we HAD to save AIG and HAD TO give these banks 100 cents on the dollar. Why not 110, 140 or more? Why stop at stupidity?


If a Republican administration did this you'd rightfully slam them. But I guess you give Geithner a pass. nice.

Posted by: visionbrkr | April 13, 2010 8:41 PM | Report abuse

Exactly the same dynamic as with health care. Lies, distortions, stonewalling, and no serious alternatives.

And the Fox News echo chamber faithfully repeats it all, and their constituents believe every word of the lies.

Posted by: herzliebster | April 13, 2010 10:46 PM | Report abuse

The alternative to taxpayer bailouts is NO TAXPAYER BAILOUTS.

If banks and WS firms had to assume their own risks:

1. They would be more cautious in borrowing/lending.
2. Stockholders would insist they be more cautious or the stocks would go unsold.
3. They would not get "too big to fail" (in case they should fail).

The same is true in ANY business. If your business can fail, you'll work very,very hard to make sure it doesn't fail. If it does fail, you'll figure out why and not repeat the same mistakes next time.

Duh?

Posted by: JuliaXA | April 14, 2010 9:54 AM | Report abuse

How about using a bankrutpcy court? As proposed by House Republicans? its just dishonest to say the R's don't have an alternative plan.

And its not just important to stop taxpayer bailouts, it is also vital to stop rescues of creditors. The Dodd bill allows creditors to be bailed out at the expense of the rest of the industry. Again the prudent being taxed to pay for the reckless. Its moral hazard writ large. The Dodd bill is the status quo.

Posted by: iculus | April 14, 2010 10:26 AM | Report abuse

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