Financial Reform: As much of a “Bailout” as a Root Canal

April 27th, 2010 by rubenr

The Republican strategy to block everything Democrats want to do in Congress has taken a hit with the pending financial reform bill.  It’s hard to gather populist sentiment on you’re side when you’re defending the right of giant Wall St. banks to develop completely incomprehensible  risk-hiding investment products that make fat-cats billions while driving the U.S. economy into ruin.  But that doesn’t mean they haven’t tried.

The most recent attempt to bring populist anger against the financial reform bill has been to characterize it as a “Bailout” for the financial industry.  Bailout is a hot word in polito-speak these days, and it’s a powerful one.  I mean, we all hate bailouts right?  Even Obama derided bailouts during the State of The Union.  Even FedEx has tried to disingenuously fight against legislation that would strip away a profitable loophole for them as a “bailout” for UPS.  Anti-Bailout fever is taking America by storm!  So a Democrat-sponsored bailout for Wall St. seems like a pretty bad idea, so why do they want to do that!?!?… oh wait… they don’t

The strongest (though still weak) argument one can make in characterizing the financial reform bill as a “bailout” involves the FDIC-like $50 Billion fund that would help cover the costs of winding down and breaking up a failing Wall St. bank.  Just like the current FDIC fund is used to help cover the costs of winding down failing banks and insuring deposits.  A couple things to note:  A $50 Billion fund might be enough to bail out a Wall St. Banker but it can’t bail out any of the leading Wall St. banks.  So to argue that the money is really going to be used to bail-out all of Morgan Stanley or Goldman Sachs is being pretty disingenuous.  Furthermore, the fund isn’t going to be created from general tax-payer dollars.  Much like the FDIC it will be developed through levies on Wall St. financial institutions themselves.  That’s right, we’re not paying for it, Wall St. is.

The other characterizations of the bill as something that could lead to future bailouts involve the lack of any express provision prohibiting future bailouts.  This is a weird argument to make… taken to it’s logical conclusion ANY bill EVER passed could lead to future bailouts, since it doesn’t explicitly bar bailouts.  Oh no! That resolution honoring the Girl Scouts?  It’s actually a bailout for big cookie conglomerates!  Ridiculous right?  It’s also silly since Congress is the actor that controls the purse-strings.  No branch of the government can just go around granting bailouts willy-nilly. Congress passed the bailouts of the past few years, and Congress can over-turn any language that attempts to limit it’s ability to make future bailouts.  (Thats why we rarely see futile language in bills trying to bind future actions of Congress).  But if pointless language will bring compromise on this bill, then so be it.

A true “bailout bill” would be to do NOTHING in the context of Financial Reform.  This would allow the sort of  behind-the-scene risk-hiding derivatives trading that propagated the financial crisis to flourish.  Forcing the government into having to choose between bailouts and breadlines once again in the future.


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