The Corner

Re: Republicans Should Take Up ‘Too Big to Fail’

Yes, Lou, it would be a capital idea for a GOP candidate to run on the idea of “stocking” key Treasury and economic posts with business entrepreneurs. This strategy would be a simple way of approaching a complex problem. 

In the same vein, it would have been far better for President Obama to nominate Simon Johnson to head the National Economic Council (Larry Summers’s old post), rather than Gene Sperling. Sperling is qualified and all that, but his cosiness with too-big-to-fail finance sends a bad signal.

Johnson, on the other hand, understands the threat that a financial industry with a mainline to the U.S. balance sheet poses:

The financial system poses a major risk to our fiscal outlook over the next few years. Unless you think that the Dodd-Frank reform bill really ended “too big to fail” and the associated excessive risk-taking culture, you should worry a great deal about the assumption of boom, bust, bailout and fiscal damage that the Bank of England now refers to routinely as the “doom loop.”

Of the national-level politicians now pushing for spending cuts, almost none showed up to fight to contain the fiscal risks posed by our largest banks. The Brown-Kaufman amendment to Dodd-Frank — which would have placed a limit on the size and debt (relative to equity) — was supported by 33 senators, only a handful of whom were Republican.

But then again, the Obama administration also fought hard against Brown-Kaufman. 

And Johnson gets, too, that the answer is not to rail impotently against big, bad finance (as politicians of both parties do), but calmly to make finance subject to market forces. 

This approach, incidentally, would be good for finance in the long run, too. What’s good for JPMorgan Chase — having its bondholders thinking that they can lose money, and thus not suffocating it with cheap funds — really is good for America. 

— Nicole Gelinas is contributing editor to the Manhattan Institute’s City Journal and author of After the Fall.

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