This morning, Adam correctly noted that the Republican anti-financial reform strategy is predicated on a bet that the GOP can "sow enough doubt to make people distrust whatever effort the administration might make." Unfortunately, that strategy is being helped by folks on the left who give conservative message maven Frank Luntz and his Republican clients more material. Here's Senate Republican leader Mitch McConnell on CNN this weekend:
CNN: But that bailout is funded by the banks themselves, is it not? It is not a taxpayer bailout?
MCCONNELL: Well, Robert Reich, who was Bill Clinton's secretary of labor, says it is a bailout fund.
Dave Weigel points to this article, where Reich -- who is one of the founding editors of this magazine -- concludes that "it preserves the possibility that the Fed could launch another bank bailout." Here, he's written that "as long as the big banks are allowed to be huge and become even bigger... they’ll wrangle a bailout from Washington the next time their bets get them into trouble regardless of any 'resolution' authority."
Reich believes that banks can and should be limited to less than $100 billion in assets and that this is the only way to stop future bailouts, no matter what is written into law, because of their massive political clout. I don't disagree with the idea that bank size should be limited, but that's not the only way to do financial reform. Especially after last week included Blanche Lincoln's surprisingly strong derivatives bill and the SEC's Goldman Sachs case, Reich's argument -- which is about the political clout of the financial sector, not a question of economic policy -- suffers from an internal contradiction: If the banks are so big that no law directly barring bailouts can stop them from being rescued in a crisis, how will a law directly limiting their size prevent them from growing?
Looking at the Dodd bill, I'm curious as to where Reich sees the possibility of the Fed bailing out banks, especially since the legislation bars the Fed from giving any money to individual banks; for a bank to even come near the FDIC resolution fund that they pay into -- which is only used to ease receivership costs -- the bank's management must be fired, shareholders' equity is eliminated, and creditors enter into a bankruptcy-like process. If Reich and like-minded progressives can point to the mechanism in the bill that would allow a bailout to happen (those loopholes may exist, I just haven't found them), I'd be very interested in the specifics. Maybe something to do with liquidity facility provisions during a crisis in some kind of multi-agency bank shot?
If these critics, though, are just assuming that the banks' political clout is such that any law can be subverted by the financial sector, that's an exercise in legislative nihilism I'm happy to pass by. More problematically, these unsubstantiated arguments are being used by conservatives to undercut the chances of passing even the incremental reforms on the table.
Instead, I'd recommend Paul Krugman's analysis of financial reform, which is similarly pessmistic but, I think, a more accurately drawn picture of the dynamics at work.
Update: Reich e-mails to note that he responded to McConnell's citation.
-- Tim Fernholz