Talking about the FCIC below, I noted that Commissioner Peter Wallison concluded six months ago that the financial crisis was caused by the government's involvement in the housing markets. (It was not.) I didn't realize that today he wrote an op-ed lambasting Sen. Chris Dodd's financial-reform bill because we don't know how the financial crisis started: "Doesn't it make sense to hear the diagnosis before enacting the prescription?" We can presumably look forward to Wallison retracting his criticisms of the Community Reinvestment Act.In the meantime, Wallison's current piece isn't a very useful contribution to the debate. Mostly he repeats right-wing talking points -- It's Obamacare, but with banks! (seriously) -- and runs through some rote hand-waving about government control of the banking system.
He does offer one actual argument: Regulated banks have an advantage in cost-of-funds if they are perceived as "Too Big To Fail," and this bill preserves that through its resolution authorities.* Dodd's bill argues that we've made it much easier for banks to fail, so it won't be a problem. Wallison thinks liquidating the companies doesn't matter because creditors will still get their money back instead of the haircuts you'd see in a bankruptcy, but that's just an assumption that Wallison makes with no evidence to back it up. The FDIC has generally been pretty good in its day-to-day receivership work at making sure that even secured creditors take a loss when necessary and there is no reason to think they won't do it on large banks.
Maybe we need to do some Miller-Moore style cleanup in the amendments process, but on the whole, the cost-of-funds issue isn't ignored in this bill, especially if regulators follow through on raising prudential standards, especially capital reserves, on the largest banks.
-- Tim Fernholz
* As a side note, a friend who works in bankruptcy law in New York was arguing with me the other day, saying that resolution authority was so vicious to bondholders that no one would ever lend money to a bank again, so clearly there's some confusion on this issue.
