The Republican presidential hopeful suggests ways to fix the too big to fail problem... with Democrats' ideas
If only former Utah governor and GOP presidential hopeful Jon Huntsman had been a Republican senator in 2010, he might have helped to ensure that the Dodd-Frank financial regulation bill passed on schedule. In an op-ed in today's Wall Street Journal, he argues that too big to fail is still a problem. He's right. But his solutions aren't likely to make much difference: most are already contained in the very regulation bill he assails.
A Good Start
Huntsman starts off by naming some deficiencies in the Dodd-Frank bill:
- Fannie and Freddie, recipients of a huge bailout and key causes of the housing bubble, go completely unaddressed
- The Fed's easy money policies weren't reigned in
- The ratings industry wasn't significantly reformed
- Regulatory capture by banks can still occur
These are all valid criticisms. But when he begins to provide his solutions to the too big to fail problem, it becomes clear that he probably hasn't actually read the Dodd-Frank bill. If he does, he might like it more than he realizes.
No More Bailouts!
He asserts that there is no evidence that very large institutions "add sufficient value to offset the systemic risk they pose." That may be true. Others might argue that the size of banks weren't the problem but that the interconnected nature of the modern financial industry makes it susceptible to crises anytime too much correlated risk builds up in the system. But if Huntsman identifies with the big-banks-are-bad camp, shouldn't it follow that they must be broken up?
Apparently not. Instead, he starts:
The best would be to eliminate Dodd-Frank's backstop.
I'm not sure what he means by "Dodd-Frank's backstop," because the bill provides no explicit backstop. In fact, it tries very hard to ensure that there won't be future bailouts, revoking the Fed's ability to rescue specific institutions. But the next thing he says is even more perplexing:
Congress should explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy.
Oh, you mean like maybe a new mechanism that allows regulators to seize giant failing institutions and follow living wills that they had produced to wind them down as quickly and cleanly as possible? That's a great idea: and you can call it the "orderly liquidation authority." That name has a nice ring to it, since that's what the Dodd Frank bill called precisely this new mechanism it created through its second title.
Tax the Big Banks
But maybe this isn't what Huntsman means. He continues by suggesting that big banks should be forced to endure higher regulatory costs. He thinks this will encourage them to downsize. Maybe, but size provides significant competitive benefits to banks, which could exceed modestly higher regulatory costs. He suggests imposing a fee on these banks if they get too large. That money, he says, could be used to pay back taxpayers if they have to be bailed out. (I know, I thought he was against this too, but let's allow this slide.)