Last week Jonathan Chait made some observations about “conservative radio silence” on financial regulation:

You can see why the issue would pose problems for the right. First, it threatens the self-image they’ve developed over the last year as opponents of the government-business nexus. Second, it’s difficult to work out a free market response. If you let Wall Street invest however it likes, it will eventually precipitate a financial crisis, with massive government intervention being the only option to save the economy. Or else you can break up the big banks, or limit their ability to take on systemic risk. Either way, government has to get involved at some step in the process. It almost seems like conservatives can’t choose which form of government intervention to accept, so many of them just aren’t choosing.

Since that time, The American has published a piece by Phillip Swagel titled, “Yes, It’s a Bailout Bill,” which I find persuasive (h/t Reihan Salam). So do NR’s editors, who wrote:

For every measure that would cut into Wall Street’s profits, another would subsidize its operations. New regulations governing derivatives would cut into the fees investment banks could charge for structuring these customized products. But the bailout authority awarded to the FDIC and the Federal Reserve would allow the banks to borrow at reduced rates, with their creditors secure in the knowledge that the government would step in if the market tanked.

Like many liberal commentators, Chait has either ignored this argument or chalked it up to the Machiavellian machinations of Frank Luntz. But I think by this point it’s pretty well established that the Dodd bill as written facilitates bailouts. The closest I’ve seen Chait come to acknowledging this was a post in which he wrote, “You couldn’t possibly design a plan to bind future officeholders from taking action to prevent systemic collapse.” True. But you could do a lot better than this bill does, and conservatives have suggested specific improvements — politically achievable improvements — that would make it a lot harder for the government to bail out creditors. But rather than keep negotiating to an outcome that’s acceptable to moderates such as Bob Corker, Senate Democrats have decided to milk the politics of this issue for all they’re worth.

So what does Chait think of all this? We know he approves of the Democrats’ political strategy, but does he still believe that the whole bailout meme was just an evil lie cooked up in Luntz’s laboratory? Or does he concede that the bill’s resolution authority would allow the government to bail out non-bank creditors? Does he think that’s not a big deal, or maybe even a good thing?

You can see why the issue would pose problems for the left. First, it threatens the self-image they’ve developed over the last year as opponents of Wall Street. Second, it makes it difficult for them to justify their preferred regulatory, tax and monetary policies. If you take away the government’s authority to do bailouts, you have to trust that creditors will re-evaluate the risks associated with lending to large firms, which would naturally curtail risk and leverage. Or else you can stop subsidizing debt and consumption so that we aren’t perpetually inflating speculative bubbles. Either way, the government’s power to order our lives would be checked at some step in the process. It almost seems like liberals don’t understand the concept of moral hazard, so many of them just are just brushing off this element of the debate.