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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

April 29, 2010 at 10:10 AM

Republicans and financial reform — where’s the beef?

After many weeks of delaying tactics, Republicans have cleared the way for the Senate to at least debate financial reform. “Concessions” have been given and more are expected. Hmmm. But let me take their talking points as sincere.

One is that the Democratic bill ensures taxpayer bailouts of too-big-to-fail institutions. The bill actually would attempt to do the opposite, by taxing the TBTFs to fund winding down a major institution in trouble rather than forcing the costs onto taxpayers. This has worked reasonably well, in another form, with the FDIC.

The kernel of truth in the GOP claim is this: The TBTFs are so big and interconnected that another panic-like situation might allow them to blackmail the federal government into a taxpayer rescue if the new bank-funded facility proved too small. Also, TBTFs such as Bank of America and JPMorgan Chase hold huge amounts of deposits insured by the FDIC — way too much for the FDIC to cover if, to paraphrase President Bush, one of these suckers went down.

The obvious answer is to break up the TBTFs and pass a new Glass-Steagall bill with a wall between risky investment banking and taxpayer-insured commercial banking, as well as other rigorous rules. Use regulation and tax policy as disincentives to gambling and get banks back to providing capital to fund companies and create jobs. Make a sea-change in derivatives, eliminating the riskiest and most swindle-prone, regulating the others. Regulate the shadow banking system.

Unfortunately, aside from perhaps Ron Paul, I don’t know of any GOP lawmakers who support any such moves.

The other contentious issue is the consumer protection agency to police predatory lending, etc. Republicans oppose it. According to Americans for Financial Reform, “the Republican financial reform summary exposes that the bill’s opponents are not actually as concerned with the resolution authority mechanisms in the bill — their ‘bailout’ canard — as they are with weakening tough bank regulations and stripping investor and consumer protections from the Dodd bill.” You can read the excellent analysis here. Watchdog Elizabeth Warren is likewise skeptical.

Today’s Econ Haiku:

H-P’s Palmy deal

$1.4 billion dollars

Will the device work?

Comments | More in Bailout, Banking, Politics and the economy

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