Politics & Policy

Huntsman Looks to Avoiding the Next Bailout

Jon Huntsman pens an op-ed in the Wall Street Journal today about the “too big to fail” banks:

 

More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today’s market.

The big banks’ advocates claim that eliminating the too-big-to-fail subsidy would disadvantage American banks against global competition. But U.S. banks’ major competitors in the United Kingdom are facing more sweeping regulatory curbs than any yet proposed here, including the possibility that the investment banking businesses of the large banks would indeed be allowed to fail. The big competitors in Switzerland, another large financial center, are being forced to hold significantly more capital to offset their risks to the government.

The U.K. is absolutely right to attempt to take away this implicit bailout subsidy, and it should be supported by the U.S. We need a level playing field, in which all banks on both sides of the Atlantic achieve solid footing without relying on the implicit guarantee of a government bailout. Experts agree that small and medium-size businesses would benefit if their lenders faced lower regulatory burdens and fair competition with the too-big-to-fail firms.

Full piece here. The question was brought up briefly in the last debate about what the candidates would do: Mitt Romney noted his extensive economic experience and then suggested it was implausible that there would be a repeat of the 2008 situation. Herman Cain defended the idea of TARP, but argued that it had been implemented in an unfair fashion in 2008. Newt Gingrich, who thinks we could face a similar situation in the near-future, called for more documents from the financial crisis to be released, so people would be better informed about what had happened. Ron Paul advocated an overhaul of the entire financial system. And then the debate moved on. 

The GOP field seems fairly united on wanting to repeal Dodd-Frank. But it would be nice to see more delving into what, if anything, they would do differently than the current status quo. 

Katrina Trinko — Katrina Trinko is a political reporter for National Review. Trinko is also a member of USA TODAY’S Board of Contributors, and her work has been published in various media outlets ...

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