Where Will the Money Go?
As Europe founders, we should be moving forward with these seven steps.


Kevin D. Williamson

3. Make sure the FDIC gets paid. In the depths of the 2008–09 financial crisis, the FDIC had to go begging for money and impose a special fee on banks in order to replenish its emergency fund. This happened in no small part because the FDIC neglected to collect premiums between 1996 and 2006. It didn’t need the money then, and it figured it wouldn’t need it in the foreseeable future. Which goes to show what federal regulators can foresee. The FDIC is one of the few federal regulatory agencies we have that works reasonably well, and it is a source of confidence for millions of bank depositors. Make sure it is fully funded and that it does as little as possible beyond its core mission. While it is impossible to insulate the agency from politics, making sure that it owns its own revenue stream is the best we can do, short of relocating the agency to Bonners Ferry.

4. Fix the money markets before they become a problem again. There is about $2.7 trillion floating around in money-market funds, which were bailed out by the Fed in 2008. As Tyler Cowen notes, they are an underappreciated source of systemic risk. The rule requiring them to keep 10 percent of their holdings in liquid assets to cover runs on funds probably is not adequate. A small capital requirement should probably be imposed on them, even though the industry is howling that this will kill profits. Other reform proposals may or may not have merit, but, again, a simple reserve cushion seems the easiest and most straightforward measure.

5. Start hanging state pension-fund managers. The SEC was right to charge the entire state of Illinois with securities fraud for lying about its pension obligations; it erred only in failing to put anybody behind bars. I’ve reported before that state pension funds are some $3 trillion short of their obligations; Steve Malanga reported in the Wall Street Journal over the weekend that state and local taxpayers are on the hook for some $7.3 trillion in obligations they never approved. Bailing out Citi was painful; bailing out California would be somewhere between the works of Dante and those of the Marquis de Sade. Washington needs to be on this before it is a full-blown meltdown.

6. Establish a BRAC-style committee on regulation and corporate welfare. Most Republicans and a few Democrats want regulatory reform. Most Democrats and a few Republicans would like to see less corporate welfare. The two are not really separate issues: Narrowly targeted regulatory measures (and regulatory carve-outs) are one common form of corporate welfare. Put the two together into a single package to be approved or rejected in its entirety, as we did with the military bases during the BRAC process. If we can deal away some special-interest tax breaks in favor of broad regulatory reform, that’s a win-win.

7. Let the next troubled bank fail. Nobody will ever believe that we have solved the too-big-to-fail problem until we let a major institution fail. If we do Nos. 1 through 6, then we have a better chance of being able to do No. 7.

The foregoing list is not a comprehensive solution to everything that ails the U.S. economy. It is, rather, a to-do list that will make the United States more attractive as a haven for capital in a troubled world while helping to ensure that our financial system and other institutions are better equipped to handle it. We want our businesses and investors to put more resources into building goods and delivering services, and less into navigating the tax code and engaging in regulatory arbitrage. We are in an interesting position at the moment: Stocks are at or near record highs, while the cost of Treasury borrowing is near historic lows. That is largely the result of the Fed’s keeping the taps wide open, but, as the Wall Street Journal argues, that is not going to last forever, and “one of these two contrary markets will eventually have to give.” What is needed now is sensible, sustained, long-term investment, driven by productivity and stable financial institutions. We have a window of opportunity to do a great number of things right while most of the rest of the world is suffering from self-inflicted injuries. We are past the crisis, and past the short-term fix. While Europe is trying to figure out what to do in the next 20 minutes, we should be thinking about the next 20 years.

Kevin D. Williamson is National Review’s roving correspondent.