Jim, Yglesias is right: The point of the bailouts was to signal clearly to investors that the U.S. will not allow its largest banks to fail. Consequentially, banks that repay their TARP money will retain an implicit taxpayer guarantee. Kevin Williamson and I wrote about this two months ago in NR:
… the government has already created the perception — and the reality — that systemically significant companies will not be allowed to fail. A year’s worth of bailouts have allowed moral hazard to spread throughout the financial system. Restoring market discipline, if possible, could be a decades-long process. If you accept the depressing but increasingly inescapable conclusion that we have already created a nation of Fannies and Freddies, then the question becomes: How do we best protect taxpayers from the prospect of endless bailouts?
Isn’t this where we part companies with Yglesias? You sketched out your principles for regulatory reform in “Walls, Not Brakes“; Kevin and I did our own sketching in “The Least-Bad Option.” We agree that new measures are needed, but we share the pessimistic view that regulation probably won’t prevent the next crisis. As you put it, “Markets constantly undermine such regulatory schemes.”
I’m not a regular reader of his blog, so I can’t say for sure, but I don’t think Yglesias shares our skepticism. He strikes me as more of an optimist about what government is capable of doing. It is possible for conservatives to agree with him that “real systematic regulation of the financial sector” is preferable to “ad hoc ’strings attached’ to bailouts” — I do. But restoring market discipline to the financial sector is preferable to either; that should be the primary goal here, however far off it may seem.
Update: Posted before I had a chance to read Andrew’s thoughts. Just one quick point in response: The government could only “take it away” by example — by allowing a large firm to fail in the post-Lehman era. Verbal guarantees are no good. How many times did we hear Barney Frank ridicule anyone who dared to suggest that taxpayers would be on the hook if Fannie and Freddie collapsed (before ridiculing him for even suggesting that they could collapse)?