7
Financial reform fails on 'too big to fail'
Glenn Hubbard, dean of the Graduate School of Business at Columbia University.
To view this content, Javascript must be enabled and Adobe Flash Player must be installed.
TEXT OF COMMENTARY
Kai Ryssdal: If there's one catchphrase for the financial crisis of the past couple of years, one thing that when you say it everybody knows what you're talking about, I'd say it's probably "Too Big To Fail."
Commentator and economist Glenn Hubbard says the reform bill by Senator Christopher Dodd that passed last week doesn't do enough about TBTF.
Glenn Hubbard: If we're serious about financial reform, then we should be worried about the Dodd bill. In particular, it seems to forget that "too big to fail" is the elephant in the room, and must be fixed.
The bill does nothing to get at "too big to fail." In fact, it makes the problem worse in what it would do and who it would help.
First, the what: The bill grants Washington too much discretion to bail out financial giants. It no longer contains a literal bailout fund, thanks to GOP opposition. But the proposed law would still allow Uncle Sam to bail out even quite sophisticated institutional creditors of investment banks who should be taking responsibility for judging which risks to take.
Just as bad, it would permit government officials to play favorites among creditors, as the Obama administration did in its bailout of automakers.
The Dodd bill doesn't just expand bailout possibilities -- it embraces them. It would retain Washington's power to make broad loan guarantees. And the Fed would be able to continue to accept dodgy assets as collateral for the loans it makes.
The result: The scaffolding for a permanent bailout authority. This is costly in taxpayer dollars and lost accountability. The ability to act in a crisis is important, but can be accomplished in other ways.
Now, the who: Who is "too big to fail?" The legislation would label some financial institutions as "systemically important" to be regulated by the Fed. This is a mistake.
Once we identify an institution as "too big to fail," it becomes more likely it will be bailed out. Investors know any money they put into it will be protected. And that would channel funds toward risky investments in financial giants. And it could discourage investment in smaller financial institutions.
We can do better than this, and we must if we want to limit "Bailout Nation" enthusiasm in Washington.
Memo to President Obama: Please ask congressional leaders for more than a subprime bill.
RYSSDAL: Glenn Hubbard ran the Council of Economic Advisors for President George W. Bush. He's now dean of the Graduate School of Business at Columbia University.
First the what: If memory serves, they did plenty of picking and choosing. In fact, they were at the helm when the ship started taking on water.
The result: A quickly sinking ship left behind for Obama to bail out. There was not only no time to think this through, but the ball was already in motion, put in play by the Cheney administration.
Now, the who: Aren’t these people all friends of Cheney and Bush? “Bailout Nation†is a Cheney administration idea.
The real absurdity: all this coming from a Cheney administration lackey. That's just so choice.
Thank you for this short commentary from someone with some degree of sense. While I recognize that common sense and deviations from the Left's talking points are unpopular among public radio's loudest listeners (for instance, the comments on this post vilify both this commentator and the Bush administration while showing little awareness of either the facts or common sense), this sort of thing is what Marketplace should be airing every day.
As long as Mr. Hubbard wants to point fingers, let us not forget how the Bush administration, through Hank Paulson, played favorites among creditors by deciding to let Lehman Bros. collapse, while "rescuing" AIG (who was the creditor, you ask? None other than Goldman Sachs, Mr. Paulson's former employer, and the source of his retirement).
The Bush administration caused America’s biggest economic collapse since the Great Depression. As one of President Bush’s economic advisors, Mr. Hubbard qualifies as someone who does not know what he is talking about. Mr. Hubbard suggests “We can do better than this†without telling us how. I suspect his alternative includes tax breaks for the wealthy. Tax breaks seem to be the Republicans’ exclusive solution to any economic problem.
I want to thank Marketplace for presenting views I do and do not agree with. I support Mr. Zipper’s request for a rebuttal to Mr. Hubbard. Preferably, someone who does know what she or he is talking about.
Don't expect anything anything out of Barack Obama and the socialist democrats in Congress other than misdirection. The too-big-to-fail banks will get bigger and so will the federal government.
"This crisis is too good to leave unexploited." -- Rahm Emmanuel (Chief of Staff to the President)
This story assumes that the problem with "too big to fail" is we continue to treat large corporations & financial institutions as if they are too big to fail. But I think this misses the point. They ARE too big to fail! The problem is that these institutions are allowed to become so huge in the first place! That any company, industry, market or economic engine of any kind, by failing, can create a domino effect that knocks down the entire world economy, is the problem. The very existence of one huge, interconnected, interdependent, world economy & huge corporations within it has created this monster. It is an "all our eggs in one basket" scenario that makes catastrophe inevitable. Only a return to smaller companies & multiple small economies can help. It's called diversification, and it's time we understood that it is more than just an investment strategy, nt, it is an essential element of healthy systems, from the economy to the natural world.
