In the wake of the recent financial meltdown, it sounds like a reasonable idea: A proposal granting the White House broad new authority to take over when a failing institution threatens to drag others — perhaps the whole economy — down with it.
Yet that proposal, included as a part of wide-ranging finance reform legislation moving through the House this month, is also sparking bouts of indignation on Capitol Hill, where at least one vocal Democrat says the provision represents an executive-branch power grab that would prop up too-big-to-fail institutions at the expense of smaller banks.
Rep. Brad Sherman (D-Calif.), a former accountant and member of the House Financial Services Committee, says the proposed new bailout authority would create a kind-of mutant extension of the Wall Street bailout — the differences being, he maintains, that the $700 billion Troubled Asset Relief Program at least had a cap on spending, an expiration date, congressional approval, independent oversight and some executive pay limits for the banks on the receiving end of the taxpayers’ largesse. The California Democrat is calling the bailout authority requested by the White House, which lacks most of those safeguards, “TARP on steroids.”
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David Min, financial markets expert at the Center for American Progress, said the resolution authority, by definition, has to be unlimited in order to maintain the government’s credibility as an effective backstop. But such a system, he added, will lower the capital costs for the largest institutions, making it more difficult for smaller banks to compete.
“The whole scheme of systemic stability really favors larger institutions and encourages them to become too big to fail,” Min said.
Sherman agrees. “That is a huge gravy train to the top 20 [financial institutions] because it allows them to borrow money at a lower rate,” Sherman said by phone last week. “Think of what this does to moral hazard.”
It obliterates it for the biggest of the big.
This is astounding. Our response to systemic risk isn’t to insist that financial institutions that would pose a threat by collapsing be shrunk down to size. No; we’re just going to commit more taxpayer dollars to the biggest of the big in the event they get into trouble.
Isn’t that how we guarantee more trouble, rather than preventing it?
