Yes, We Will Have No Bailouts

When Mitch McConnell charged that the Senate Democrats’ bill to reform financial regulation would lead to “more bailouts” for Wall Street, I could almost imagine how GOP word-smiths had racked their brains for ways to spin the effort.

Here was a bill aimed at clamping down on the rapacious mortgages and wanton risk-taking by Wall Street firms that nearly destroyed the financial system and led to huge bailouts. It would be hard to find groups that are more detested by voters — including populist Tea Partiers and End-the-Fed supporters of Ron Paul — than big banks and Wall Street.

GOP leaders know exactly why they oppose the bill: it’s a Democratic bill. Full-stop. But will that fly with ordinary voters? Do red-state conservatives hate derivatives regulation even more than they hate Wall Street greed, trillion-dollar bailouts and all the bad things that led to the epic meltdown? Doubtful.

That’s why McConnell’s attack was so clever. He appeared to be on the ramparts fighting Wall Street rather than helping Wall Street firms avoid all the things they hate: a consumer protection agency, regulated trading for credit default swaps and new levies on the banks to pay for past and future calamities.

Is McConnell right? Let’s nip this in the bud.

It is true that the Senate bill would require financial institutions to put up $50 billion to deal with possible future meltdowns. It is also true that federal regulators would have new “resolution authority” to shut down failing institutions in an orderly way.

But those are very different things from pre-authorizing future bailouts. The recent bailouts kept zombie banks and AIG alive, because both the Bush administration and the Federal Reserve correctly feared that their collapse would set of a chain-reaction of failure. The bailouts were necessary because the government didn’t have the authority to shut the companies down in a orderly way.

One big example: Fed and Treasury officials didn’t have the legal power to force creditors of AIG and others to take haircuts. They had two stark alternatives: push the companies bankruptcy, let them default on hundreds of billions worth of obligations and let the chips fall where they may; or prop them up, bail out the creditors and hope taxpayers would get their money back after the crisis.

The new resolution authority would give the government new powers to take over and shut down failing giants. That is quite different from bailing out a bank and keeping it alive.

What’s that $50 billion for? The same thing that the Federal Deposit Insurance Corp’s fund is for: shutting down institutions without sending shockwaves through the whole system.
If the system stays the way it is right now, we are all but certain to have another round of real bailouts at some point in the future. On top of that, the big banks will remain much harder to rein in if they lose their heads in another orgy of recklessness like the last housing bubble.

The Democratic bill may not be nearly tough enough on Wall Street and the banks. But it certainly doesn’t set up a system to bail them out all over again.

Republicans might be able to cloak their opposition with what sounds like anti-Wall Street rhetoric, but they do so at their peril.

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